A car fund is a tool that will help you stay out of debt. Avoiding car payments is a great way to keep your financial stress to minimum. Your car fund is the place where you save money for your next vehicle. It’s a sinking fund dedicated to the purchase of your next motorized chariot.
Pay cash. I can’t be any clearer than that. Keep saving for as long as it takes you to have enough cash to pay for your next vehicle.
Once you’ve bought a vehicle, continue making that same payment to your car fund. Whatever you’re driving now will not last forever – all vehicles eventually need to be replaced.
How much should you be contributing to your car fund?
That’s an easy one to answer. Go to any car manufacturer’s website and use their loan calculator to determine the monthly payment for the vehicle that you want. That’s the amount that should be going into your car fund every month. If you were planning on making bi-weekly payments on a car loan, then arrange to have that bi-weekly payment sent to your bank account.
This method serves two purposes. First, it will assist you to build the savings needed to pay cash for your next vehicle. While it’s obvious, I’ll say it anyway so that there’s no room for misunderstandings. The more you save, the faster your pile of money will grow. Secondly, and less obviously, saving your car payments in advance of purchase allows you to experience the real-time effects of a car payment on your current budget. If the calculator says your car payment is going to be $600 per month, then that’s the amount you set aside every month.
If you had taken a loan, you’d be making that $600 payment to the creditor. Making payments to yourself tells you whether your budget would’ve been able to handle a payment of that size. By saving the money in advance, the impact on your budget is the same – you’re still giving up the use of that money. The fact that the money is going into your car fund doesn’t alter the fact that you’re not at liberty to spend that money on something else.
Can your budget handle a car payment?
You’ll quickly get the answer to this question by setting aside this chunk of money in advance of your purchase. Either you’ll be able to comfortably live on the whatever’s left over after the contribution to the car fund, or you won’t.
So if the answer to the last question is yes, great – keep saving until you have enough cash to buy the vehicle outright.
Should the answer to the question be no, then you’ve got some decisions to make about your money. Maybe you want to consider buying a less expensive car. Alternatively, you may decide to simply save your money over a longer period of time so you can get the vehicle that you really want. There’s also the option of getting a part-time job, or finding a side hustle, that will bolster your contributions to your car fund.
Avoid taking out a car loan if at all possible. Incurring that kind of financial stress won’t make your life better. Instead, pick a cheaper vehicle and save up your money until you can pay for it in cash.
Finally, if you absolutely must take out a vehicle loan, then follow the tips that I’ve talked about here. Debt beggars the borrower while enriching the lender. It’s in your best interest to minimize the amount of debt that you pay on a vehicle loan.
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Weekly Tip: Make a will. No one is promised tomorrow. The province will divided your earthly belongings according to a pre-determined list if you die without a will. For those of you have specific bequests in mind, get yourself to a competent lawyer to have your will drawn up and properly witnessed. This way, your wishes will be followed when you’re no longer around to tell people what your wishes are.