Save for future vehicles
As a general rule, wealthy people do not finance cars – or anything for that matter. It’s easy to understand why: saving money for a car (rather than borrowing and paying interest) reduces the overall cost and saves you money in the long run. Let’s stop borrowing money for vehicles and start acting wealthy.
To quickly demonstrate how much vehicles cost (even when paid off), consider the following examples:
- $500 saved over 12 months at 1% bank interest will yield $6,032. Purchasing with cash gives the buyer bargaining power and the ability to purchase, say, a $7,500 vehicle for $6,000.
- The same $7,500 car financed at 10% over 3 years will cost $242/month and will end up costing upwards of $8,700.
In this crude example we see that saving and delaying the purchase for a year could hypothetically save us $2,700 ($1,200 in interest costs and $1,500 in bargaining costs.) It’s also important to note that buying private party, even if you finance, allows you to retain bargaining power by bringing the lump sum to the transaction.
You get the idea, but what about the cost of owning a “paid for” vehicle?
Cars are expensive to own
Setting aside the “paying cash vs. financing” debate, let’s consider how much it costs to own a “paid off” vehicle. Have you ever ran the numbers to see exactly how much it costs to own your car?
Betsy and I own a car, a Jeep, a motorcycle, and a scooter (but plan to sell the scooter soon.)
Focusing solely on the car and/or Jeep, let’s take an elementary look at the numbers:
- $200/month for gasoline (G)
- $100/month for repairs and maintenance (M)
- $60/month for car insurance (I)
- $10/month for plates and registration (R)
G + M + I + R = cost/month for your “paid for” vehicle.
Running the calculation through for our situation reveals that we spend roughly $360/month for each vehicle. Since both the car and Jeep are “paid off” we see that it cost us approximately $720/month to own both – which is roughly $8,650 annually.
If you finance your vehicle you can simply add an [(F) for financing] to the equation: F + G + M + I + R = cost/month for your financed vehicle. I’m sure you won’t be excited about the results of the equation, but it’s very eye opening.
Make the change
We were originally saving for 2 replacement vehicles, not anymore. While we have no immediate plans to sell either vehicle, we are no longer planning to replace both when they give up the ghost. Instead we will only replace one, which means our “Next Auto Fund” goal just went from $12,000 to $6,000 (it is currently funded around $3,100.)
Update: We bought a new vehicle (much better gas mileage) and are selling the other car, and the Jeep.
It could be argued that we need both vehicles, but a better case could be made for only needing one. Especially if we’re able to separate our emotions from the situation (a wise thing to do when contemplating any financial decision.) After talking it over with Betsy, she agrees that while having the 2nd vehicle is nice, it is not a need.
Alternatives to owning a car
Depending on where you live, where you work, the size of your family, and other considerations – with a few sacrifices you may be able to avoid owning any vehicles, or perhaps get by with less. These suggestions obviously won’t work for everyone so apply it to your situation and be creative.
- Invest in a bicycle. People spend so much money on cars but are typically unwilling to invest in a solid bike. If you spend $1,000 you can get a commuter bicycle that, with the proper maintenance, can last years.
- Walk. If you live close to your grocer and employer, consider walking more. Just be sure to invest in a nice pair of shoes first.
- Carpool. Pay your coworker to hitch a ride everyday and leave your sole vehicle home with your spouse.
You don’t have to get rid of all your cars, but I do encourage you to run your own numbers through the calculation above to get a better idea of just how much vehicles cost, and to begin seriously considering alternatives.
What about you?
Do you own or finance your vehicles? Using the above calculation, how much are they costing you? Will this information change your views of current and/or future vehicle ownership?