New Car, Used Car

I have a car. The car I have functions, and thats about it. It’s a little on the old side. A little on the worn out side. It’s had some good days and some bad days. The car has come to the end of the road. It has done it’s time. The car would like to retire. The car I drive is a 1995 Honda Civic hatchback. It needs to be replaced sometime soon.

So how and when will it be replaced? That is a very good question. I’d prefer to have the car replaced sooner rather than later but our bank statement is telling us we have no money to replace this car. The bank statement is right we haven’t been saving up for car replacement. Currently we are so focused on debt repayment that we just haven’t looked at putting money away for a car replacement.

If I didn’t have debt, we would be putting away money for big purchases. Did you know that if you put away $500 each month for 9 years and 9 months, you can then start to buy cars valued at $20,000 every 5 years and not touch the principal balance in that account. You’d be doing this just on the earnings the money makes. This is based on $500 a month, 6% rate of return, and not touching the money till you had enough principle to earn $20,000 every 5 years. The assumption is also made that you would remove $20,000 after the 9 years and 9 months, so this builds in building up that amount as well.

What if like me, you are driving around your own personal junkyard? What if it needs to be replaced right away? Here if what I’m going to do once I get the debt paid off to get my but into a better car. One, I will use $500 per month set aside for this purpose. Now if I set aside $500 per month in 10 months I’d has $5,000. At this point I’m going out and looking for the best and lowest kilometer used car that I can find for $5,000. I might be able to sell my current junkyard civic for around $500 to $1,000. If I can sell it before I have to buy a new vehicle, and if I can find a friend to drive me around to look at those vehicles, I might be able to look at cars in the $5,500 to $6,000 range. Now when I get this beater I’m looking for a car that should hold the value pretty good in the short term. I’m not going to keep this car very long so I’m also looking for a car that doesn’t need much maintenance.

I will continue to save $500 per month. Another 10 months go by and I have again another $5,000 I will start to look for better used cars. This time I’m looking to sell the car I just bought 10 months ago for either about what I paid for it or slightly less. Let’s assume the junkyard I’m currently driving didn’t fetch anything and went to the junkyard. That means the first car I bought had to cost $5,000. Let’s say it deprecates a bit in the 10 months I own it and it’s worth around $4,500 thats a 10% drop in worth, which I doubt would happen. I’d put in on the market at the price I paid for it but I’d be willing to accept $500 less for it. So I like to look at the worse case, and that would be getting $4,500 for the car. Combining the selling price of this car with the cash I’ve managed to save and I have $9,500 to put towards a new car. I could start to look at an off lease KIA or something like that. basically I’m now looking for a car that will last me a much longer time, say 5 years.

So in 20 months I’ve managed to move from a junkyard civic to a much newer and hopefully less worn out car. That is pretty sweet.

Lets move forward in time a little bit more. Fast forward 5 years. I’ve been faithfully dumping $500 into my car account. At this point, with no interest I’d have $30,000 dollars saved up. If I got 6% rate of return I’d have $34,885.02. I could buy a pretty fancy car with all that money. But I’m not going to. I’m only going to take $10,000 out and use it towards a newer used vehicle. The car I’ve been driving for 5 years has run its course and is probably worth around $1,000 to $1,500 so I’d accept whatever the dealer would give me for a trade in on the car.  again for the next 5 years I’ll funnel $500 into this account and just let it grow. After the 11 years and 8 months that this scenario has been playing out, I’d finally be able to stop and just buy cars with the earnings the money makes. If I’m cautious about how much I spend and how much I get as a trade in for my car, this money will last a life time. Also if I buy cars that are still going strong after 5 years, I’ll be able to use some of this money for other things, like furniture or whatever we need. just being cautious to let some of the interest continue to compound.

My life will change a lot in 11 years and 8 months. I might have children by then. I might own a home. But one thing is sure. once this debt is paid off I’m going to be saving all the money we were putting against the debt. The goal is to buy cars when they are needed and never get a loan or monthly payment to do just that.