Much of personal finance writing works like a scalpel, helping the reader to carefully pare down their consumer expenses. “Make this phone call, or use this coupon, and you’ll save $10 per month,” they’ll say. Or, “Switch to this type of heating to save 10% on heating bills”. This is all well and good, but sometimes I read a fact that makes me want to drop the scalpel and pick up a sledgehammer. Two such facts are that the average cost for a new car is $28,000 and that, in America, our car payments average $475 per month. What use is it clipping coupons when we’re dropping $5,700 per year our cars? This for an asset that will nearly always be worth less today than it was yesterday, and on and on until it ends its life as a metal cube in a junkyard.
Fortunately, there is a better way. Below I outline a system that will guarantee a lifetime stream of efficient, safe used cars for a mere $30 per week, with $0 in interest going to banks. It takes some discipline and planning, but as I’ll show below, the savings can be enormous.
Be the Bank – Instead of diverting $475 per month toward a bank loan, instead start being your own bank. Online banks such as CapitalOne360 allow the creation of multiple savings accounts with descriptive titles. Open an account specifically for cars and start an automatic transfer to it of $30 per week. Over this short of a time horizon, it doesn’t make sense to try to put this money into the stock market. So don’t get too fancy; just make sure the money is safe and liquid.
Use the 7-7-7 Method – In order to maximize your dollars, try to buy a gently used, dependable car using the “7-7-7” method. This means purchasing a car every seven years that itself is about seven years old and has roughly 70,000 miles on it. This ensures that you are buying affordable cars that still have significant life in them. Using Kelly Blue Book you’ll find that seven year old cars that meet this description tend to retail for around $10,000 from a dealership. If you’re brave enough to buy them from a private party, that number could inch down toward $9,000. Your new savings account, which at $30 per week will amass $10,920 every seven years, will be more than enough to cover your cars in either scenario.
A list of cars worth considering could be its own post. I did not run an exhaustive survey of the used car market. But of the few dozen cars I researched, the following fit best into the 7-7-7 model: Honda Civic, Honda Fit, Hyundai Elantra, Toyota Corolla and Toyota Scion. All of these could be purchased, in their 2008 model, for around $10,000 with 70,000 miles on them, and all of these brands have a reputation for long service life.
Add More for Contingencies – If you’re worried that your older cars are going to surprise you with additional maintenance, put an extra $10 per week into your savings account. At $3,640 over seven years, this buffer will help defray the cost of routine maintenance and insurance.
Speaking of Insurance – In the last few years of your car’s life, save some extra cash by opting out of collision coverage. You can do this for two reasons: you now have enough money saved to purchase a car in the event of an accident, and your car is no longer worth enough to insure. This is what it means to be the bank: you can stop paying a premium to let others mitigate risk for you.
Reap the Benefits –It’s hard to understate just how much money this method saves. Versus the traditional $475/mo. car payment, a person can expect to pocket at least $4,000 per year, or $28,000 over a seven-year period. Does this number look familiar? It is the average cost of a new car (listed above), meaning that an entire new car’s worth of cash amasses in your bank account while you’re driving your used car. This doesn’t even take into account the lower insurance costs of a used vehicle, or the lack of gap insurance. For this windfall, all you have to do is save a little per week and drive an older car. All of this extra money can be saved toward a mortgage down payment, or put into a retirement account, where it will compound into hundreds of thousands of dollars over time.
I can already hear the chorus: “this won’t work for me because…”. Because why? I’ve heard many objections to buying used cars and I think I can debunk them all.
“I drive too much to rely on an older car.” – The average American drives 15,000 miles per year. So after purchasing this car and driving it for seven years, it could have as many as 175,000 miles on it. But this isn’t a number that should give us pause. Plenty of cars can run for this long (or longer) with routine maintenance, and these are the cars we want to buy. It’s important to break the mindset of a car as something you buy with 0 miles on it and sell before it hits 100,000. Let the another driver do that and pass the savings on to you.
There’s a limit, of course. If you drive 40,000 miles per year this method flatly will not work (if you drive 40,000 miles per year in a non-company car, I’d question some of your choices, but that is another article altogether). But with numbers this large you can see that even if you need larger cars, or need to buy cars more often, you can still realize significant savings with a modified version of the plan (say, a 4-4-4 plan).
“This isn’t realistic. It’s hard to actually get a used car in this condition.” – True, shopping for a used car at the price you want, with the miles and quality you want, will not be a one-day task. Kelly Blue book provides estimated values, but finding an actual car to purchase is another matter. This method is admittedly more difficult than buying a new car. But actually, looked at another way, a purchase of this size and importance should take a lot of legwork. It is precisely because buying a brand new car on a payment plan is so insane financially that dealerships work so hard to make it the smoothest option.
In the end, I believe that the extra time and effort is worth it because the potential for savings is so large. Imagine that you’ve been offered a deal at work: over the next few weeks, your boss will need you to come in at odd hours, for a few hours at a time, and work with some new employees. At the end of this period, your boss will pay you $14,000, and your work will be done. Do you agree? I hope so!
“Cars are my passion and I deserve to drive a new one” – I fully support this reason for buying a new car…if all of your other financial goals are being met. If you keep your mortgage current and fully stuff your retirement accounts every year, do not let me rain on your parade of new SUVs. But the fact is that most Americans just are not funding their retirements adequately. Having a shiny new car is fine, but not at the expense of having to drive it to work when you’re 70. And if you’re worried about how you’ll look driving a car that isn’t shiny-new, get your car professionally detailed. Do it often if you like. You can now afford it!
The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities.