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How We Broke the Cycle of Car Payments

How We Broke the Cycle of Car Payments

How We Broke the Cycle of Car PaymentsIn the late summer of 2010 we paid off my minivan. The payment was $460 per month. Instead of just absorbing that money into our monthly budget we opened a separate savings account and continued to make that payment to ourselves.

In Feb of 2012 we had enough in that savings account to pay off my husband’s car. This made us debt free! At this point we started saving all of our previous car payments into our “car fund”. $667 per month goes into that account. It’s taken some small hits along the way with unexpected car repairs and such but for the most part we been saving, saving, saving.

If you do the math we are saving just over $8,000 per year in that account. HOLY MOLY!

Here’s what’s weird. When I tell you that we had $667 in car payments each month I assume you think “Ok, yeah, two cars… that seems about right.” Yet when I tell you that we save that same amount I feel like you are thinking “oh boy, I could never do that! They must make a lot of money!” Yet is the same money! The only thing we did was not buy a new car when we paid off our current ones. We just kept driving the same cars and paying the same money.

Anyways, moving on…

So now that’s it been a few years we have quite a bit saved! Enough to start thinking about replacing one of our cars… with cash. Our cars are getting older. My car has 80,000 miles and my husband’s has about 90,000. Since I work from home I don’t drive much. However, my husband works over an hour away. So he is thinking he will get a new car in the next year or so. If he waits one year from today, and we continue to save without any bumps in the road we will have about $23,000 saved. Plus whatever we can get out of selling his car.

That’s a good amount! I wouldn’t spend it all though. So say we spend $15,000 out of the savings account, leaving $8,000.

I can probably get an additional two years out of my van (three years from now). Maybe even more, but lets say it will last three years from today, it will be 10 years old at that point. That will give us $24,000 in savings to spend. Certainly can get something for $24K.

Then we are off an running. It’s only downhill from there. We will have many years of savings before we need new cars again. If we keep saving those car payments we should be able to get by with never having a car payment again. We will have broke the cycle!

What did we do differently than most people (and I include myself in that because I’ve had plenty of car payments in my life)? Well, first we committed to paying off my van 2 years early. Then we just held tight. We didn’t replace our cars even though we could afford the payment. We just kept on doing what we had always done. Keep making the same payment, only to ourselves now, and keep driving the same cars.

The trick is to just pretend that you do have a car payment even when you don’t. Pay the money and forget about it. Save the money and don’t touch it.

How about you? Have you ever paid cash for a car? Do you make payments to yourself? Do you think this is just a crazy scheme that will never work for you?

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18 thoughts on “How We Broke the Cycle of Car Payments”

  1. Bravo!! I haven’t had a car payment in years. Unfortunately, we didn’t take this step of putting the same amount of money into a separate account. Most likely because we couldn’t afford the car payment in the 1st place. Now our “newest” car is 8 years old, and we purchased it new – with cash – in 2009. We did start a “car fund” about 3 months ago and set up an automatic monthly transfer into it so we (hopefully) will have a large amount of cash set aside for when we need to purchase again. Meanwhile, we hope diligent maintenance of our current vehicles will get us to when we have enough saved.

    Again, Bravo to what you’re doing!!!!

    1. Awesome!! It’s so freeing to even think about buying a car with cash. It makes me heart sing! Plus the having the extra money in savings makes me feel safe, rather than having a car payment which is just one more thing to pay in case of a job loss or other emergency.

  2. Jason@LiveRealNow

    That’s awesome! We haven’t completely broken the cycle, yet. We haven’t had a car payment since September, but half of the last car payment has been redirected to add extra to my mortgage payment. We’ve only got $1100 set aside for the next car.

    1. ah, but I know you are guys are doing just fine. ๐Ÿ™‚ Buying a car will be easy peasy once you get that mortgage totally gone.

  3. This is exactly what we plan to do now that we’re done with our debt management plan. It’s hard to pay yourself that kind of payment each month when you don’t have to….but it will certainly be worth it the next time we walk into the dealership to buy a car. Just the savings in time of not having to deal with a finance person would be worth it! ๐Ÿ™‚

    1. oh, I hadn’t even thought about that. I’m going to feel pretty bad ass when we pay cash. But I wonder if you can get a better deal if they think they are going to make some money in interest?

    1. Yeah, if there is other debts still I can see not putting it aside for cars. That’s why I didn’t title the post “How you can break the cycle”… no, it’s just how WE did it.

  4. We were doing this too since we bought our cars in 2005 and 2008 and paid them off in 2007 and 2009 respectively. But then we used our new car fund to cover 20% down on our new house in 2012, so we are rebuilding the fund now. It has about $4500 in it now, but my car will need work this week and then everything is unknown. Our hope is to have the fund up to $10,000 by the end of this year. We’ll see how long our cars hold out and if we can buy the next one in cash or not…

    1. Ah Crystal, you plan ahead so much I’m sure you will be able to pay cash if you want to. ๐Ÿ™‚ You are an awesome saver.

  5. David @ Simple Money Concept

    This reminds of that book, The Millionaire Next Door. It turned out, they don’t buy new cars. They buy used cars! Nowadays, car quality is much better. Even a used car has all the whistles and bells from the new car.

    1. Yes, good point. That book does point out that millionaire’s buy used cars, and that has also been true in my experience as well. I’m sure our next round of cars will be used. I have bought a few new cars in my life, but new or used, I drive all my cars into the ground. ๐Ÿ™‚

  6. I had forgotten about that book! Will have to reread it, as it has been a while. Yes, paying cash for a car does make ya feel like a bad a$$. When we bought the new-for-us truck in 2009 (it was 3 yrs old), it felt great to say “I have X amount cash I will pay for it, not a penny more. That includes tax, title, everything.” YES…it felt great to say that.

    1. David @ Simple Money Concept

      I completely forgot about that book too until I read this post. Will need to do some digging to find that book…

    2. Tax… forgot about tax. When you are financing you don’t get caught up in little details like sales tax. ๐Ÿ™‚

  7. We always buy 3yr old vehicles and then drive them for 10yrs. We have 2 so we have them on an alternating schedule so we replace one or the other every 5 yrs. We always pay cash, but that’s because our normal basic day to day essentials have been cut down to about 55-60% of our income. In years when we aren’t replacing a car all the excess goes to retirement savings, extra mortgage payments, and our annual trip. In a car replacement year we generally just plan a less expensive trip and make sure no major house maintenance is planned in the same year. Depending on your salary and what you plan to spend on the car, if you are essentially banking one entire salary it can take as little as 3? months to set aside the funds to purchase a car with cash. When we decide the time to replace a car has come, we temporarily stop the retirement and extra mortgage payments and let the excess pile up until we have what we need. We buy the car and then go back to diverting all the excess to savings of some sort (or the next trip).

    1. Yay for paying cash for cars! I love to hear other ways of doing it. Yeah, you are probably right that if we stopped all other savings we could save up cash for a car pretty quick! I guess I never thought of doing it that way.

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