Op-Ed by Paul Wimsett and AR Bunch
Following on from the information Sage Advice #2…
A car is one of the biggest expenses we have at any one time and a source of constant frustration. Sure, home ownership will come with lots of things that need fixing from time to time, but cars are moving things full of moving parts. It’s a whole other level of ability to destroy itself from the moment you buy it.
Good advice starts with this…get a high yield savings account especially for the car and label it, “fix or replace.”
You may decide to trade-in your current car, or sell it for cash, to help with the down payment for the next car, but that’s not adequate. You don’t want to be financially destroyed by unexpected auto breakdown. These things happen at the worst time.
Searching the market to get the right account for this. It might seem over-cautious but owing for a car is one of the ways that debts accumulate over time. No one here is legally qualified to give you financial advice, but we’ve done enough research to know that savings accounts do exist, that give a slightly higher interest rate in exchange for limiting the number of times you can access it per year. That’s what you want.
Putting as much down as you can will reduce your monthly payment, which is turn lets you squirrel away a little bit toward your next down payment. The idea is to turn some of the money you pay in interest on a car loan into money you’re paid interest on when saving toward your next car loan.
Obviously your going to potentially dip into this account for big repairs but that’s not something you can include when doing the math. (Just consider the decision to fix your current car as delaying the purchase of the next car so your adjusting the timetable buy the amount you’re taking out of savings now.) So for the purpose of doing the math work only with saving toward your next purchase.
Doing the math:
A quick word about maintenance; you should try to keep your car at least five years, which shouldn’t be difficult with regular oil changes and tune ups. (Do not take oil changes/tires/gas etc out of your repair fund—those are operating expenses.)
Even though your car SHOULD last five years, assume that you’ll need at least the down payment for new one in two years. There is no telling what sort of car you’ll buy in two to five years, or what it’ll cost, so look at the newest model of the same car you own now. What’s the price of a 2020 Honda Civic, for example? $21,650
What’s price will that car be when you buy it 3 to 6 years from now?
Some models depreciate better or worse than others and an individual car might fair worse than others of the same model. Most cars depreciate about 20% in the first year and 15% each year after that so that 90% of the value is gone in 10 years.
At this rate our Civic should sell for about…
The fast way to double check the numbers is to compare to KBB.com when the time does role around. But for the sake of pedicting we’re we’ll use these numbers.
Price will have fallen in half by the year 2024 which is why we’re recommending buying a car 3 to 6 years old. Whenever possible put 20% down and take out a 60 month or shorter loan.
$10,637 x 20% = $2,128
To save that in 2 years just divide it by 24 months = $88.65/ month.
Other Car expenses:
Look to budget for car-related expenses, insurance, roadside assistance, taxes & registration and so on. What is the best way to pay these bills? Would it work out cheaper monthly, quarterly or yearly? Obviously the bills come when they come, but be sure to increase the size of your regular savings to account for saving toward those expenses.
Try to limit your expenses, which is easier to say than to do! Experts we know say that household accounts are where money tends to evaporate and your efforts will be in vain if you leave the heat up on vacation, etc.
Secrets to Saving:
The secret to success is automating your savings. This sounds a bit glib, but there are ways your bank can automatically move money to saving each month so you don’t have to think about it.
Know the bank’s rules on overdraft should you have to take one out.
Other sources of Money for a Car:
Some folks have been able to take out a second mortgage, leveraging the equity in their house instead of financing car? The logic behind this, is that borrowing larger amounts of money results in a lower interest rate. On the downside, your house is essentially securing your car.
As we mentioned in part one of sage advice, if you are buying your first car, you’re probably involving “the Bank of Mom and Dad,” but beware of the stress in family loans can put on relationships. Find out how much are they willing to spend and ask if they need something in writing?
Overall Budget Considerations:
Experts say you shouldn’t spend more than 20% of what you take home on your car. You might have to play this one by ear though, for a low paid job 20% might not be a lot.
Keep in mind cars are a handy tool, but a terrible investment. So don’t make sacrifices to have a nice car. A lot of this advice has been boring common sense, more than sage advice, but it’s a good idea to think logically about cars.