How to Buy a New Car with Cash

One of the first things that we all want to do when we graduate college and head out into the real world is to buy a new car.  We deserve it right?  We worked hard to get good grades, we graduated and now we are making the big bucks.  So why not go out and get that new car to prove that we have finally made it.  It seems like the perfect time.

However, there is never a good time to go into debt for any purchase including a car.  You may already be starting out with the burden of student loan debt and to add a car loan to that equation would make life very difficult for you.  This doesn’t mean you can never have a new car; it just means you need to take the proper financial steps to obtain one – steps that will not stymie your future goals and bank account.

If you were to buy a new car for $18,000 and take out a car loan for it, your monthly payment would be around $325 per month.  You would be making those payments for 5 years (60 months) even if your financial situation changed (job loss, relocation, downsizing, etc.).  Taking that amount as an example let me show you how to purchase that new car with cash in just 4 years.

Year 1 – Buy, with cash, a decent used car (estate sale car) for $2000.00.  Then for the next 12 months put away $325/month (amount your car payment would be) into a savings account.

Year 2 – Sell your used car for $2000 (you have only had it one year) and add the $3900 you saved together and buy a $5900 car.  Continue putting away the $325/month for the next 12 months.

Year 3 – Sell your car for $5900 and add the $3900 you saved and buy a $9800 car.  Continue putting away the $325/month for the next 12 months.

Year 4 – Sell your car for $9800 and repeat process – purchasing a $13,700 car.  If you repeat for the entirety of year 4, by the end of the year you can purchase a car for $17,600 – cash.

This is how you buy a new car with cash in just 4 years.  Now, you may ask “what is the difference in taking out the loan and paying cash if it will just take me one year longer.  I could just pay it off early. “ There is a big difference – several in fact:

1. You save over $2000 in interest. That’s right – when you use debt to purchase something, you always pay more for that item because you are using someone else’s money.  So if you use a car loan to get the new car, then you will actually be paying $20,000 or more for the same car.

2. There is no risk. When you take out a loan, you are assuming everything will go perfectly and nothing will change for the next 5 years.  That never happens.  With the cash plan, if you can’t make a payment one month, that is okay.  You get to keep your car instead of having someone haul it away.

3. You get a different car every year – if you choose. You don’t have to sell your car every year, but it is a great way to upgrade and to try different things to see what you like.

Debt is never a good plan – ever – whether you are just starting out or you are 50 years old.  You are always borrowing from your future to have something that you want now and as long as you spend more than you have, you will never have money.  I would never advise you to not buy a new car – I just bought one last month – but I will always tell you to pay cash and never go into debt.  Cars are not an asset – they are just a means of transportation.

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