6 Steps to Paying Cash for Cars – Part 3 of Financial Freedom for the Next Generation

The financial gurus of our time tell us that we need to pay cash for the cars we buy. Dave Ramsey is a huge voice today and before him Larry Burkett offered the same simple truths. The basic idea is that borrowing money to buy something that will quickly lose much of its value is not a wise financial decision.  Unfortunately in the last 5 years the percentage of borrowers who owe more than their car is worth has been as high as 30%. Well don’t panic! There is another way, and it won’t cost you more money. It will only require you to just be patient for a few months. It is possible for you to buy any car you want some day and pay CASH! Here are four proven steps that work, if you use them:

  1. Use whatever cash you currently have and buy an old reliable set of wheels. This is Car #1. What I mean is, buy the best you can afford at the time as long as it is reasonably reliable. This may cost you $500 to $1000. If you don’t have that kind of cash around, I recommend having a garage sale or two, mowing lawns, shoveling snow, working overtime and selling items you don’t need on Craigslist or ebay. Get creative! As you will see, this is an important step in the process! The idea is for this car to last you for 10 months or so. Maybe as long as a year, but it doesn’t have to be very long. These cars are out there. I have bought and sold them myself.
  2. In this step you need to begin saving monthly for your next vehicle. What most people do is borrow money to buy a new car or a nice used car and then they start making monthly payments to a bank. Why not pay yourself and put that money in your OWN bank account? The average monthly payment for a new car today is over $450 for six to seven years. Why not start your process by saving $300 a month for 10 months? The goal for this step is to have $3000 at the end of 10 months.
  3. The next step is to buy Car #2 with the $3000 you have saved over the last 10 months. You can also sell Car #1 and put the profit into your savings.
  4. Now you need to make sure you don’t spend the $300 a month on movies and pizza! You need to continue saving for the next 5 years or 60 months. You should be able to drive this better car for 5 years and all the while saving $300 a month. Your total saving time at the end of step four will be 70 months. This is just under 6 years.
  5. This is the fun part! At the end of 5 years of saving (remember that you could have signed up for 6 or 7 years of payments!) you go shopping for Car #3. You will have saved at least $18,000! Now I know you can find a great pre-owned car in that price range.  This is the kind of car you have been waiting for. As a part of this step you should also sell Car #2. For this discussion let’s assume you net $1000 from car #2.
  6. The final step in the process is to determine how long you want to wait between cars. If you want to buy a different pre-owned vehicle every 5 years, you could do this without any trouble. Let’s say you time it right and sell car #3 for $9,000 after 5 years. At the same time you find a great car in the $28,000 range. No problem! You netted $1000 from the sale of Car #2, you made $9,000 from Car #3, and you have just saved up another $18,000 by paying yourself $300 a month all along the way. You can write a check for $28,000 and pay for your nicest car ever. This would be just under 11 years into the process and without any debt. Do you see how exciting this can be? It only gets better from here.

The point of all of this is to learn to wait for the things you want. It is called delayed gratification, or more simply, patience. People get “new car fever” and they make a decision based on monthly payments, not on actually having the money. Again, you can buy the things you want with cash if just learn to wait and save for a while. This is more about personal discipline than it is about money. You don’t have to drive old cars forever, but you will for a short time. If you remain disciplined and focused, you can write a check for a very nice car in less time than it would take you to pay off the average new car today! If you are a recent college graduate and put this plan into place, you could be driving a pretty nice “paid for pre-owned vehicle” by the time you are 30. And you won’t be in debt!!!

Here is a related benefit. Let’s say that while you are waiting and saving, something urgent comes up. Some crisis takes place that is going to cost $2000.  You have a car fund that you could fall back on if there is no other solution. Now you should have an emergency fund in place for these things, but just to make the argument, a car fund would give you an additional layer of protection in the event of an emergency. If you are making payments on a car, you won’t have the option of selling a portion of it to raise cash will you?

Parents, I encourage you to put this plan into action in your own life, and encourage your teens to do the same. They will be so glad they did!

About The Author

Duane Rockensock

Duane (Rocky) Rockensock is a husband, a dad, and the National Reconditioning Manager for AmeriGas Propane. Since he was a teenager, Duane has loved hearing the stories of how people have started creative businesses or found ways to use their talents to accomplish amazing things. For that reason he started this blog to encourage teens and adults to find their purpose and to provide the tools and resources to make that happen!

  • Jason

    This is really good stuff, Thanks Rocky!