My dad has offered my husband and me some pretty solid budgeting advice over the years and the topic of this post is yet another great piece of advice on how to save for your next car while paying for the current car. At first my husband and I scoffed. Why would we need to be saving for the next car when we just bought a brand new car?! It turns out there is a lot more to the situation than we thought. You see, we both brought a totally paid off car into the marriage and neither car was old enough to be a huge cause for concern. Sure, mine was worse off and we’d need to replace it sooner, but that was a future problem.
Here’s where my dad’s advice comes into play. Whether you have a car payment or not, you should always be budgeting as if you have a car payment. The logic is simple: pick a car payment amount you can afford and put it aside every month. The caveat here is that you need to be putting aside enough money to actually cover a car payment on a car you would buy. This car fund then becomes a pot of money for repairs on your current car or the down payment on the next car. See my post on how to decide whether to repair a car or sell it.
Admittedly, my husband and I took our sweet time implementing this budgeting technique. We had a savings account, but nothing specifically earmarked as “car.” In fact, we didn’t create a specific “car” savings account until we moved to Georgia. To provide numbers (I’m a number person and I think it helps), each month we set aside $500 for cars.
Unfortunately, delaying this budgeting approach hurt us only a few months after moving to Georgia. My car finally bit the dust and it was time for a replacement. Since we’d only been saving for a couple of months, we had less than $2,000 in the car account. There’s no minimum down payment requirement or PMI associated with a car loan, but it made us really uncomfortable to borrow so much money so soon after closing on our house. Luckily, we had a generic savings account and we pulled from it to increase our down payment. If this hadn’t been the case, likely we would have had to get over it and put down less thereby increasing our monthly payment.
It’s been about a year since we purchased the new car and we’re still sticking to the budgeting technique. Our monthly payment is about $375. We are very debt averse, so we overpay each month by $75. This leaves us $50 each month for regular maintenance to the new car and repairs to my husband’s car. Over the life of the loan, the over-payment will save us somewhere around $200 in interest. We’re assuming (hoping) nothing major goes wrong with either car while we’re still paying off the new one. We have less cash now, with the hope that we will have more cash later. This approach isn’t for everyone and if not for our other savings accounts that can bail us out, we likely would pay the regular monthly payment in favor of having cash in hand.
We will have the new car paid off in about 3 more years. At that point, we’ll keep funneling the entirety of the car budget into the car account and will let it pile up until it is time to replace my husband’s car. The beauty of this approach is that it is possible to save up large quantities of money toward vehicles. After we’ve paid off the new car, if we can get one year without any major vehicle repairs, we will save almost $6,000 toward the next car. This is, at the very least, a nice down payment on the next car.