I just paid off my car. Should I trade it in now?Submitted in Money Wise by Devin Thorpe on November 05, 2012
Congratulations on paying off your car. There were probably days along the way when you worried the car wouldn’t last as long as the loan on the car, but it made it! You have taken a huge financial step forward. Now what?
Follow this simple system and you’ll never have a car payment again!
- Keep driving the car you have now. Take care of it. You want this baby to last for years. (If you haven’t told your car lately that you love her, now might be a good time.)
- Keep making the car payment. What!?! Make the car payment into a savings account. Keep the money sacred for your next car.
- Buy a “new” car. When the cash accumulated plus the value of your trade-in (which we know is going down every day) combine to buy you a car you’d like, one that you can drive comfortably for years to come (even if it’s a used car), go ahead and buy it.
- Don’t borrow any money. When you buy your car, don’t borrow any money. If your savings is only $5,000 and your trade-in is only worth $5,000 either buy a $10,000 used car or wait for your savings to accumulate a little more.
- Keep making the car payment. What!?! I know, I said this before, but you just bought a perfectly good used car for cash and you might think you could stop making a car payment. Don’t stop. Keep putting the car payment into your savings account month after month. In five years, you’ll have enough to buy a very nice used car or an affordable new car.
- Don’t borrow any money. You’re beginning to see the pattern, aren’t you? Now that your car is paid off, you never have to have a car loan again. Just be disciplined enough not to buy a car you can’t afford to buy for cash.
Let’s put some numbers to this example. If your car payment was $500, you can save $12,000 in two years—plus you’ll earn interest on that. If you had a five year loan on a new car, your car is likely about seven years old—still in very good shape. It may be worth $10,000. You can now purchase a car costing about $22,000. Yes, it may be a used car, but likely only a few years old. You can easily drive it for another five years. At the end of the five years, you’ll have $30,000 plus interest in savings and a car worth about $10,000 as a trade in. You’ll be able to purchase a car as nice—or nicer—than the one you bought five years ago—but this time for cash! Keep making your $500 per month car payment to yourself for the next seven years and the neighbors will really be impressed with the car you bring home.
Chances are, however, when you start spending your hard-earned savings for your cars instead of the bank’s money, you’ll find you have less interest in the fancy car and more interest in the other things you can do with the money. You have kids who want to go to college. You want to retire. Following this system will put you in financial control of your life and empower you to better provide for your family.
Devin Thorpe is the author of Your Mark On The World and is a Forbes Contributor.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.Website: www.yourmarkontheworld.com