This could be the shortest post ever because I could simply write “Save money every month for a few years and then pay cash for your next car”. However, I break down my process for buying vehicles with cash below. Now that I've been Financial Coaching for 7 years, I truly believe paying cash for a car is one of the biggest financial flexes you can do and I hope you can get yourself to a point where you can do it too!
I’ve been driving around my 2012 Toyota Corolla since, well, 2012. I bought this beauty brand spanking new with only 10 miles on it. Technically I leased it and ended up buying it after the lease since I was so far over my mileage limit. That car now has 195k miles and although it’s still running very very well, a few weeks ago my son and I ended up stranded on the side of the road when my alternator went out. The repair only cost us about $750 but I decided it was about time to see how much money I had saved for a new car.
If you don’t know my story, I paid off $149,000 of non-mortgage debt. I was terrible with money and made tons of bad decisions. After we paid it all off, we decided that we wanted to avoid debt at all costs in the future. We know that cars have a limited life span, so we started setting aside money every month into a savings account. After my alternator was fixed, I checked the account and we had $20,000 saved to buy a new car. Not too shabby! I outline some steps below that may help you with your next car purchase.
Identify Your Budget
How much do you want to spend on a car? How much is reasonable to spend with your income and current financial situation? The second question is a lot less fun to answer but it’s the more important question. Early in my career when making $60k, I wanted to buy a Subaru STI or a BMW M3. Man, I loved those cars and still do, but spending $35-45k on a car when I only make $60k would have been very dumb. I was also drowning in debt at that time and had no business buying even a $10k car. For this current car, I decided that I wanted to spend between $18k-$20k.
This step goes hand in hand with the budget step since the type of car you want will impact the budget. I’ve always loved cars. I wouldn’t call myself a “car guy” but I enjoy a nice car. I got spoiled in college as a valet at a really nice hotel. I parked Lambos, Ferraris, Rolls Royces, and the most expensive car I ever drove was $1.5million. Over the years I became a lot more practical and realized I just need something to get me from A to B. Sure it would be nice to have an electric car, or heated seats, or all the extra safety features but a basic mid-size car that’s a few years old is enough for me.
If I’m honest, I really wanted a Tesla Model 3, but it didn’t fit in my budget. Years ago, I would have ignored my budget, goals, and wise decision making to take out a loan to get what I wanted. Now, I just don’t see the value in spending more for a car knowing my income and future financial goals. There is absolutely nothing wrong with having nice things or nice cars. If people can afford it, I’m excited for them that they can get what they want. The problem that I see too often is people aren’t honest with their financial situation and don’t have clear financial goals. They buy a car because they want the status, or luxuries that come with it, or simply to keep up with their friends. Then they are locked into a high payment which hurts them and their future finances. When “getting specific”, don’t just think about the car you want but make sure it fits in with everything else in your life. Make sure it isn’t going to hurt your other financial goals.
Eventually I narrowed my search down to 2 cars that fit within my budget. A 4-5yr old Toyota Camry or 3-4yr old Subaru Crosstrek. Getting specific helped me save time when I searched around. I didn’t mindlessly scroll through and look at every car, I just searched for those cars.
It takes time to save $15k, $20k, $30k, or whatever your budget ends up being. Let’s say your budget is $20k. Saving $300/month will take you over 5 ½ years. Saving $500/month will take you 3yrs 4mos. I created a separate online savings account with Capital One. I set up automatic transfers to take $150 every month from my checking account. $150/month would have taken me forever to save enough but that’s all I wanted to dedicate each month for my budget. To help with savings, any time I made extra money, got a bonus, or hit a 3-paycheck month we would take a small chunk of the extra and add to the savings account. It took me about 4 years to save for this car and I know I’ll have about 5-8 years to save for my next one. I explain what I’m going to do differently this next time further down this post.
This is the hard part. I’m someone who likes to take action as soon as I finalize my plan. Once I know I want to buy something, I’m typically at the store or online that day buying it. Waiting for the right car at the right price takes a lot of willpower for me but it was worth it. I’ve wanted to buy a new car and have occasionally browsed since early 2020. Seeing the prices increase over the last two years has been deflating but I stayed patient and saved more. The best situation is when you don’t HAVE to buy a car right away. I already had a car that worked just fine so I could take as much time as I needed. I set up a few searches on OfferUp and looked through the inventory about every two weeks in the Fall of 2021. The first 4-5 weeks of 2022 I literally searched every night until I finally found the right car at the right price. Luckily, I was first to jump on it and set up a meeting immediately.
Once you find the car, you'll still need some patience as you investigate and decide if you'll actually buy it. I found a 2018 Subaru Crosstrek with 60,000 miles on OfferUp. I asked the seller a lot of questions before deciding to continue. He was the only owner with no accidents and a clean title, all which I confirmed with a Carfax. The owner had records of all vehicle maintenance which he exclusively had done at Subaru dealerships. I got paperwork from the mechanic showing everything (which was basically nothing) that showed up during their inspection of the car. The seller had just put brand new tires on which looked amazing. I test drove the car to get a feel for it. He also threw in the roof rack and hard case. I seriously dont think I could have asked for a better scenario so it was a no-brainer to pull the trigger and buy it.
You may need to do some research on how to buy a car through private party in your state. It’s relatively easy in Arizona but I still prefer to conduct the transaction at a bank. In this case, the seller still had a loan, so we met at his bank. I had previously transferred all our car savings into our checking account so we were ready to write a check. However, when we sat down with the banker, they told us that a check would take 3-5 days to clear and then we’d have to come back. So basically, I pay off the seller’s loan and hope that he shows up in 3-5 days to sign the car over to me. That sounded like a TERRIBLE idea. So I asked how we can get it done today and they said we’d need cash. I ran over to my bank and withdrew $22k in cash. In my head I thought I’d need a briefcase or something big to hold it all in but they easily put the cash into two small envelopes. I couldn’t believe that’s what $20k looked like! Then I stuffed those envelopes into my pockets and ran out the door to my car. I imagined everyone knew I had that money on me so thought everyone I ran past was going to take me down. Lol. It was a very uncomfortable and stressful 100yard dash, but I probably set a personal record. Once I got the cash to the bank, the transaction went through smoothly and I got to drive my new car home!
What I’ll Do Different Next Time.
Inflation has smacked me around over the last two years. Our family expenses have soared higher and higher every month and we’ve seen the car market go nuts over the same time. I was terrible with money just a few years ago so saving enough cash to buy a car was a big deal for me. I didn’t want to complicate it; I just needed to establish the habit and be disciplined enough to save. Now that I’ve mastered that, I want to go to another level. I know I’ll want/need another car in 5-8 years. That’s long enough for me to take some risk with my next savings goal. I opened a brokerage account and invested in a low fee index fund. I will continue to save and invest with this account with the hope that my investments will at least keep up with inflation. Instead of putting cash into a savings account each month, I will set up auto transfers to this investment account. Ideally this invested money will help me to save for my next car a little faster too. This is a risk and there is no way to predict if the stock market will crash and burn or do well in the future. For my risk tolerance over 5-8 years, this is what I’ll do different this time.
Hopefully these tips will help you with your next car purchase. As a Financial Coach, I work with people who want/need to learn to budget, pay off debts, make large purchases, dream for the future, learn about investments, etc. If you have any questions about your specific situation, don’t hesitate to contact me HERE. We can set up a FREE 30-minute consultation.