When you need a new car, how do you pay for it?
Most folks take out a loan and end up paying for years for the privilege of tooling around on new wheels. But, hey you know you’re going to need a car eventually, right? Why not start saving for it now, and when the day comes around you can either pay cash or at least reduce the amount you need to borrow.
Money set aside for a known future need (like a new roof on a house) is called a sinking fund. Voila! The sinking car fund. Someday, when I live near water, I’ll have a sinking boat fund.
If you plan to buy a $50k BMW in 5 years, set aside $10k/year. Put it in a savings account (not investment account), or at least in a safe investment-grade bond fund. This is a relatively short time horizon, and the need for capital preservation is greater than the need for high return; otherwise, your BMW could turn into a Beetle (which is a cuter car IMHO).
You can finess the calculation by including the expected turn-in value of your current vehicle, the rate that cars are increasing in cost, and the expected rate of return on your savings account. The important part is to start saving now, and minimize (or eliminate!) the amount you end up paying in interest.
Also, you are in a much better position to negotiate down the price if you’re offering cold hard cash.
Science and Money Feed
Affine Financial Services » Blog Archive » Can an 18-year-old get a car loan?
on Aug 2nd, 2009
@ 6:47 am:
[...] payment, say $300/month, until you have at least half of the amount of the car price. Better yet, save up the entire amount and pay cash for the car. You’ll have a lot more strength negotiating down the purchase [...]