There’s a common misconception that the only way to buy a car is to take out a big loan and get cozy with a fat monthly payment. But in reality, buying a car in cash is something that you can (and probably should) do. Reaching a point where this is feasible simply requires a plan and discipline.
The Case for Buying a Car in Cash
Buying a car with a loan seems normal (everyone does it), but is actually one of the single biggest chokepoints in wealth building. Because unlike taking out a loan on a house, which is almost certainly going to increase in value over time, a car is a depreciating asset. Here’s the math:
- Sixty seconds after driving a brand new car off the lot, it loses a cool 9 to 11 percent of its value. That means a $40,000 car instantly becomes worth $36,000. (Yikes!)
- After a year, your car is worth just 80 percent of its original price. (And that’s if you take excellent care of it.) Using our example above, your vehicle will be worth just $32,000.
- Each year thereafter, your car will depreciate by 15-25 percent annually. That means your new car will lose 60% of its value after the first five years. As a result, your new $40,000 car is worth just $16,000.
But that’s not all! If you finance the car, you’re paying interest to own a depreciating asset. So not only is the car losing value, but you’re actually paying way more than $40,000 for the vehicle. If you made a $5,000 down payment on a 60-month loan at 4.5 percent interest, the real cost of the car would be somewhere around $47,000.
The key to being a smart car buyer is two-fold. First off, buy a used car – even if it only has 2,000 or 3,000 miles on it. Secondly, pay in cash. Yes, the car will still lose value, but at least you aren’t paying interest and taking the brunt of the depreciation.
2 Tips for Saving Enough Money to Buy a Car in Cash
You don’t wake up one morning and decide that you want to purchase a car in cash. Depending on your income, it could require anywhere from 3-12 months to set aside enough money to make it happen.
Here are some simple tips to help you save cash in a fast, efficient, and logical manner:
- Cut Expenses
When it comes to saving up money, most people automatically go to a place of, “I wish I made more money.” And while, yes, earning a higher income can make it easier to accelerate your savings and investments, it’s only half of the equation. Expenses and spending habits make up the other side.
The quickest and easiest way to save more money is to cut your expenses. Typically, this requires nothing more than some strategic planning, self-discipline, and a willingness to forgo temporary satisfaction for long-term gains.
Here are a few ideas to jumpstart your savings:
- Plan out a “no spend” weekend (or week), where you don’t spend money on anything other than groceries and fixed expenses (like rent/mortgage, insurance, etc.). This will do two things for you. First, you’ll realize that you don’t actually need all of the things you waste your money on during the course of a normal week. Secondly, you’ll see how easy it really is to save money. (Many households save several hundred dollars right off the bat.)
- Don’t buy groceries for an entire week. Instead, eat through your pantry and freezer. (You’d be surprised how many meals you can make out of the food that’s already in your house.)
- Go through all of your required monthly services and look for opportunities to lower rates. Get auto insurance quotes from multiple companies and see if there’s a way to save on your premiums. (Speaking of auto insurance, take the cost of policies into account when searching for a vehicle. Buying one car over another has the potential to save you hundreds of dollars annually on insurance.)
- Cancel all monthly subscription services, including Netflix, Spotify, Prime, and online memberships. Do this for at least 90 days.
If you do these four things, and nothing more, you’ll see progress. But if you combine these ideas with the rest of the tips in this article, you’ll get even faster results.
- Pick Up a Side Hustle
You’ll create a ton of margin in your budget by cutting expenses. But if you want to pour fuel over the fire, consider adding a side hustle. It doesn’t have to be some amazing career opportunity. Anything to earn a couple of hundred bucks a week is great. Ideas include:
- Delivering pizzas
- Driving for Uber
- Renting your home on Airbnb
- Setting up an Etsy shop
- Offering services on Fiverr
- Dog watching
- Freelance blogging
- Consulting (in your area of professional expertise)
By increasing your income in tandem with decreasing expenses, your finances will undergo a significant transformation right before your eyes.
Buy Your Next Car in Cash
It might sound impossible, but buying your next vehicle in cash is more feasible than you realize. It won’t happen right away, but with several months of intentional earning, spending, and saving, you can realize this goal and elevate your finances. Be patient and put in the hard work!