As we close out the year, I want to write something off the beaten path, at least for me. Before I do, let me say I hope you have had a great 2016 and wish you the best in 2017.
In my opinion, most people in the United States should never have car payments. There are exceptions because life happens but in general, most people could buy their cars with cash and I am not talking about clunkers either. I am talking about nice new cars.
Of course, that is 180 degrees opposite of prevailing wisdom in which most people assume that only a few can afford to plunk down $20-$30,000 to buy a car. However, this is one of those times where prevailing wisdom is wrong and I can prove it. In fact, I am going to tell you exactly how to do it. (It will take me all of one short paragraph.)
Just for fun, I will tell you what my family drives. I drive a 2007 Honda Accord EX-L. I bought it new with cash for about $27,500 and honestly, I still love it. It is the most “loaded” model and still feels new and plush to me. I may drive it another 5 years or so. However, to be fair, I drive way less than many of you. I think it has no more than 120,000 miles on it.
Our other family car is a 2014 Honda Odyssey EX-L. Again, it is the most loaded model (except for the touring one) and I bought it new with $32,000 in cash. In case you did not notice, I like Honda, my wife (OK me too) loves loaded cars, and I like buying new. I like Honda because it is reliable and the Odyssey is the most roomy minivan on the market and I like new because in the case of Honda, they hold their value so well that you really don’t save much by buying used. In other words, I see no real benefit in paying in the high 20’s for a 2-year-old Odyssey if I can buy a new one for $32K.
David is about to buy a car. He is going to buy my parents’ 2007 Toyota Corolla for $2,000. That is important because he can pay cash for it now and that will allow him to start this plan and possibly never have a car payment his whole life.
I told you about our cars for a few reasons: first to prove that I am putting my money where my mouth is (paying cash rather than financing) and second, to emphasize that we are not suffering here. I am not buying $80K cars but we are not buying clunkers either.
Can your family do the same thing that my family does? Can you buy cars just like the cars you drive now with cash? Here is a one-question test for you: do you CURRENTLY buy cars with financing?
If you answered yes, you can do what we do. You can say goodbye to financing and car payments. It really is as simple as that.
Here is why I say that. The average car payment in the US right now is approaching $500/month. If you are paying a financing company $500/month, you are capable of saving $500/month if you did not have to pay that company. There are a lot of people who can’t imagine saving $500/month but the truth is they easily can simply by not having a car payment.
So what is the magic formula to getting rid of car payments? All you have to do is delay your next car purchase 4-5 years after you pay off your current car and keep making the payments into a savings account.
How does this look practically? Let’s say you bought a car for $25,000 two years ago and have two years left of payments at $500/month. Go ahead and finish the payments but then, just keep the car four more years after that. If you put that $500/month into your savings account, after those four years, you will have $24,000. Trade in your 6-year-old car for whatever you can but between the trade-in and your $24,000, you will certainly have more than enough to buy a car at least as nice.
Obviously, I am using rough numbers here and you can tweak them how you want. There are all kinds of factors that affect things like the value of your trade-in or what you sell your old car for in a private sale, the cost of the car you want to buy, your current monthly payment, etc. However, at the end of the day, you will find that roughly four years of saving your current car payment will allow you to about cover the cost of an equitable car.
When you are thinking about New Year’s resolutions, this might not be a bad one–to make a tiny tweak that will change your balance sheet for the better.
Car buying tips when you pay cash
When you are buying a car without financing, things get a lot simpler. That is especially true for a new car. When I buy a car, I request a written “drive-out” quote from all the dealers in my area for the exact car I want (year, model, trim, color) and I let them know that I am comparing prices and they have one chance to be the lowest price. I also use online car buying sites that allow buyers to document the prices they pay for cars and if the quotes I get are higher than those prices, I use that data to knock the price down further.
Car dealers try hard to complicate a sale by adding their fees. I want you to refuse to play that game. Ask for the “drive-out” price which means the amount you will write on your check inclusive of all fees, taxes, etc. When they try to add their “destination charge” or other fees on top of the price they have given you, stand up and start to leave. They will insist that they HAVE to charge those fees (even their mother pays those fees). Tell them that they will have to take that fee off the price of the car. Again, the only number you should negotiate should be the number you are ultimately going to write on a check when you leave.
If you can possibly help it, be vague about whether you are going to finance the purchase and for sure be vague about things like extended warranties and other overpriced products that will be pushed on you in the back room. Negotiate ONLY the price of the car in the front of the dealership and push off the other stuff until the main price is finished.
Once you get to the back room, you can really get taken advantage of and in general, you just need to keep saying no. Do not buy an extended warranty during that time for any reason. The initial price they quote you will be enormously inflated. They will reduce it many times if you keep saying no and then they will call back with a better offer the next week. Even then, you probably can get a cheaper and better extended warranty from a third party company if you really want one. (I don’t buy them at all.) Don’t fall for the packages they try to sell for free oil changes and other service either. Don’t buy undercoatings or other modifications to the vehicle during that visit. If you want to add a luggage rack or something, do it after the purchase is done. Anything you want to modify can be done the next week after you have time to shop it a bit and I can assure you will save money by waiting.
Here is one last thing I want to say. Car dealers are human too and most of them are honest people. They have a tough business and there are very thin margins in new cars. If you do this right, they are not going to make much money off you and they may get mad at you before you leave. When I walked out of the office after buying the Odyssey, the tension was very thick. In spite of that, try to treat them with dignity and not assume they are crooks. The industry has sort of forced them into a situation where they have to do some things that are not ideal but that does not mean they are snakes.
Hope this is helpful. Again, happy new year and I will return to music next week.