A few years ago, I had received an 11-year-old Honda Accord from my grandparents that I was ultra-grateful for. It was a very valuable head-start in my adult life, when I needed a car for work. When I totaled it four years later on an icy road (I was very lucky to escape unharmed), the insurance paid out almost $4,000, which gave me a couple of options.
I could have made the $4,000 a hefty down payment on a very respectable new or used car and taken on a few hundred dollars a month of car payment. However, I had some money saved, and I didn't like the idea of having to pay interest on a loan.
Instead of opting for a more expensive car, I bought a 14-year-old Honda Civic with 144,000 miles for about $5,200. Between my savings and my insurance payout, I was able to pay cash.
This time, I did something smart to prepare for the next car down the line: When I got the Civic, I began saving $300 each month in my high yield savings account as an approximate "car payment." I chose $300 based on car commercials and a little light internet research, figuring it wasn't the highest or the lowest car payment, but right about average. There were months where I couldn't swing that much, but if I had extra to spare, I'd try to make up for it during another month.
I put that money in my Ally Bank savings account, which earned about 2% interest (the account's rates fluctuate with the market) over the three-year life of the Civic. I made about $360 and saved about $11,000 for my next car.
The Civic was not beautiful, but Hondas have a reputation for a substantial lifespan. I ended up being able to drive the car for three years, putting another 55,000 miles on it with my substantial commute. With 199,000 miles, no air conditioning, and a couple pending repairs that were going to cost more than the value of the car, I ended up trading it in to get my next car.
Over the life of a car loan, I'd have paid more than $500 in interest to buy that same Honda Fit, based on a used car interest rate of around 4%. Instead, I earned over $350 towards that car by saving ahead in a high-yield savings account instead of paying on a loan. The swing of $850 would be even more if I was considering more expensive cars.
In the future, I'd be willing to choose younger or nicer-looking cars, but I hope to always save the money ahead of time, if possible. Even if I have to take out a car loan, I hope to have some money saved as either a down payment or a little "car emergency fund" for surprise repair needs.
I realized that, even if it means living with much less nice cars for a while, I'm proud to work to pay cash for my car. I recognize that I got a lucky break from my grandparents that let me start this process, but I believe that, by buying a less-nice car and saving a little on the side, this same strategy could work for most of us.
To us this strategy, you have to be willing to, at the beginning, live with a less than beautiful car. This isn't for everyone, but I was able to make it work for the three years I had my Civic; while it had a few repair needs, it was mostly a reliable form of transportation.
There were some really sweaty commutes with no air conditioning to get to the point where I was ready to buy another car. After I traded in my Civic for a much-younger Honda Fit, I felt like the sacrifices in comfort and style had been worth it. I spent about $8,500 on my 6-year-old Honda Fit with 46,000 miles, getting $500 in trade-in value for the Civic. The Honda Fit has been my most reliable and low mileage car ever, and I was able to buy it in cash.
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