Here's a piece from Yahoo that talks about how you should save money by buying a used car. This isn't really new news to anyone who reads Free Money Finance on a regular basis, so I'm going to skip that part of the article. However, I do want to make mention of two parts of the piece that I found interesting.
First, the author comments on an email she received from a reader:
When I recently mentioned that I buy cars for cash, I got an e-mail from an outraged reader: "Your financial rule is to pay cash for a car? That would be nice but unrealistic. How can I pay cash for a car? A simple car costs around $20,000. With what I take home, it would take me another 10 to 20 years to save enough for that."
Well then, you need to either: 1) work on your career so you're earning more or 2) spend less than you earn. That's what I do. Then I pay CASH for my cars. It works whether you buy new (which is what I do) or used (as the author of this article does).
Next, the author comments on the cost of cars and how expensive they are for the average family:
Transportation is a gigantic expense. Since 1984, Americans have spent more on transportation than any other category but housing, according to the Consumer Expenditure Survey conducted by the Bureau of Labor Statistics. In the 1960s, families spent $1 of every $10 on transportation -- today it's $1 in $5, according to a report by the Surface Transportation Policy Project.
Families that own two or more cars and are infrequent transit users spend 20 percent of their income on transportation, on average, compared to 10 percent for heavy transit users who own one or no vehicles, according to BLS statistics.
Wow! Lots of $$$$$$$ being spent here.
Of course, there are ways to save on cars. Here are some thoughts from Free Money Finance:
- Money Saving Tip: Save on Car Insurance
- Money Saving Tip: When to Buy a Car
- Money Saving Tip: Keep Your Car in Top Shape
- Saving on a Car Purchase, Buy Used
- Good, Better, Best Money-Saving Ideas: Car Buying
- How to Save $10,000 on Your Next Car
- Saving Money on Your Car
- More Car Saving Tips
- Money Savings Tips: Save on Car Expenses
- Top 10 Car-Buying Mistakes
- Ten Ways to Protect Yourself from Used-Car Sales Tactics
- Buying Cars, Millionaire Style
- Buying Cars, Millionaire Style, Part 2
This has been my father's number one peice of advice for me growing up - never take on debt to buy a car!
Posted by: Amanda | April 05, 2006 at 12:19 PM
I think also, a person can get a cheaper car (maybe doesn't look as sporty) but is more economical. Some of the entry level cars are about 12-14k. And of course ,if a car payment was put in savings each month after paying the car of (and keeping the car for a few more years) the cash would be there. I wish I would have thought of it before I bought my car!
Posted by: annab | April 05, 2006 at 01:40 PM
This brings up two thoughts in my mind:
1) When people spend 1 dollar out of 5 on private transportation, it makes me wonder why initiatives to fund public transportation are so controversial. When it is done right, as in Europe, it is a big cost saver for the public at-large.
2) I believe the trick to paying cash for a car is to get on the right treadmill. Most people are on the debt-payment pattern, but people who pay cash in effect make virtual car payments into an investment account. While the first plan involves paying a little over 100% for a car, due to interest payments to the bank, the second plan is like paying less than 100% because you collected interest. It requires discipline and buying some modest cars at first, but given the choice I would much rather collect interest than pay it.
Posted by: Duane Gran | April 05, 2006 at 03:23 PM
When I was very young, about 18 or so this elderly man told me exactly how to purchase a car. He told me to use my "savings" but not buy the car out-right. Huh? I said.
He explained . . .
One should always "save money." As much money as one can possibly save while you are young. Then NEVER touch the principal, but USE the principal to create "income" to purchase what you need.
For instance, a young person works hard over 5 years to save $32,000 (that's $500 a month @ 4.0% annually, compounded monthly). They want to purchase a car that if financed over 4 years would cost them $250 a month.
Take the principal ($32,000) put it in an investment that earns 10% annually (or more) and you have $266 in interest.
The INTEREST on your principal (your savings) pays for your car. At the end of 4 years, you have a fully paid for car + your principal + any additional savings (since you are now in the habit of saving) you've accumulated.
He called it "letting your money work FOR you, instead of working for the money."
It's funny how we're so quick to think in terms of debt (paying out) to get what we want, instead of working our resources to make payment come "in" to get what we want.
Posted by: Rosalind | April 19, 2006 at 04:19 AM
I, like you, also pay cash for my cars but it was not by choice.
During 2000 I owned a 1998 Lexus ES 300. I had a whopping $420 monthly payment, $250 monthly insurance payment and two years left to payoff the balance.
Then the unthinkable happened, the transmission "broke" right after the manufacturers warranty expired. My mechanic informed me that a new transmission would cost anywhere from $5,000 - 6,000, and that's without labor. At this time I only owed $9,000 on the car!
I sold the car for $7,000 and paid the lender the $2,000 difference. Since then I haven't financed any cars. Since the payoff on the loan cleaned me out, I brought a 1989 Volvo for $1,500 in 2001 and worked my way up to a 1995 Taurus in 2004 for $2,500 and a 2001 Taurus in 2005 for $5,500. All three cars combined did not cost me as much as the 1997 Lexus.
Also remember, paying with cash allows you to "choose" your insurance coverage. When you finance, the lender will, in most cases, require full coverage insurance (collision, comprehensive, theft, etc.). Now I have basic liability on both cars costing a fraction of the "full coverage" price.
Posted by: MafiaDon | July 19, 2006 at 04:09 PM