My husband I this past November purchased our first vehicle with cash, ever. What a rush! What a feeling of financial success.  We drove my old car into the ground, until it fell apart, until it was necessary to purchase a new one, well a NEW used car!

We walked into the dealership and swiped our debit card for $19,000 and walked away with a vehicle we owned. Car payments are not a way of life and we OWNED that car off the lot. No payments, it was ours.

This money was set aside for a new car, specifically. This money was outside of our emergency savings or long term savings goals. It was saved for the car, only.

This took planning. Of course, about 7-8 years ago, we got out of debt and in 2010, my husband sold his house. By May 2010, when that house was sold, we were debt free. Being debt free meant we were able to put money aside for everything else. The amount of a car loan (which lately, talking with real people, averages to be around $300-600 a month) was able to go into savings. The monthly payment on a credit card or anything else, all was able to “bank roll” into savings.

We made a long term goal to purchase a car with cash. We knew, 5 years ago, that my car probably had another “handful” of years left. We gave it 4 to be safe, 48 months to save what we estimated was $15000 for a new (used car). This would normally be (with simple math!) $312 a month. I worked second jobs or anything for income, we also used tax returns to add to our car (and other long term savings) plans.

We got 5 years out of the car and a little extra savings.

It recently got me to thinking, how much we saved SAVING for a replacement vehicle monthly and paying in cash, then in a car loan.

A recap: we saved, on average $250 a month for 5 years, with some tax return money thrown in (do not get me started on the power of positive tax return use!), and purchased that car with $19,000.

Bank rate shows the average interest rate, now, for an auto loan is between 3-5%.  For a $19,000 car loan on an average finance loan of 5 years, your monthly payment would be be between $341.41-358.53. After 5 years, you would have paid (again, depending on interest rate!) $1450-2660 extra, just in interest.

Of course, the math can be done on any type of loan.

Pay less (into your savings) each month, for a car (furniture, a vacation etc.) you will not have to pay interest on.

How about the math on a credit card where the average interest rate is 15%. Say you purchased clothes on a credit card, your kid’s school clothes for the fall. A necessity, they need clothes that fit when they go to to school, and you spend $500 on clothes. You also had a car emergency for $1000 and took a vacation for $2000, giving you a credit card balance of $3500.  Your minimum payment would be $78.75 and thanks to, a simple calculator says that it would take you 231 months, over 19 years, to pay off that balance, paying $3854.38 in interest, over the cost of the items you purchased!

Of course, increasing your minimum payments helps. Increasing the minimum payment above to $178 a month, would take 23 months (almost two years, 17 years less than the minimum payment) and you would pay 1/8 of the interest of above, at $542.10.

Better option? Everything always comes back to the budget. Make a realistic, livable budget for your family that you stick to monthly that has room for savings, as much as possible. Save for needs first and wants second, and only purchase what you have the cash to get. Not enough cash? Change your budget. Increase your income, decrease your expenses to put more savings aside.

Source: Blogger Import

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