Many people approach the day they pay off their car as a significant financial milestone. Sadly, some see this as the time to simply get another car and keep the banks in business. I want to challenge anyone who has a car payment to consider the financial impact of living without a car payment. Start by thinking about what another $300-$500 (or more) would look like in your budget. I know as my wife and I approached paying off two cars, I was pretty excited to think about what another $800 per month could do for our budget. Based on my personal experiences, I put together this list of options for that money and hopefully it helps several people see car payments in a different light.
1. Resist the Temptation to Buy Another Car. Every month that you don’t have a car payment is more money you can bank or save. Below are several ways to save and invest that money.
2. Make Those Car Repairs You Have Been Putting Off. Perhaps when you were making car payments, you might have put off some maintenance or repairs. Now you have the money to do those things and it should help your car to last longer. Additionally, when you are ready to buy, the better shape your car is in, means you should get more credit for it as a trade in. Related to repairs, you might also want to look into getting an extended warranty (check with a local car dealer.) We did this for my wife’s car and it turned out to be a great investments as her power steering pump went out (right before the warranty expired.)
3. Keep Making Your Car Payment. But this time, make the payment to “the bank of YOU.” A great way to have a lower future car payment is to save so you have more money to put down on your next car and less to finance. Where you put this money depends on where you are in your savings strategy. It might be rebuilding an emergency fund, growing your long term savings, or something else. Given my affinity towards Infinite Banking, I would highly recommend using that type of account to safely build your new car fund. This post also gives more insights on “How to Self Finance Your Car“. If you are using this strategy, just make sure you put the money in an account where you can get access to it, in the event that you find yourself needing to make that (dreaded) purchase.
4. Check Your Insurance Policy. Talk to your insurance agent and see if having “full coverage” still makes sense as you might be able to save some money by reducing your coverage. Here is some insight on how to make that calculation from ClarkHoward.com:
There’s a rule of thumb: Take your monthly premium to for the collision and comprehensive insurance. Multiply it by 12 (or by 4 if you pay quarterly) to determine your yearly cost. When your yearly cost for C&C becomes greater than 10% of your car’s current value, that’s the point at which you can remove the full coverage, and just pay the liability premium. This math is based on the law of averages for accident claims.
If you decide that making this reduction is the right decision for you, make sure you put that money away. Make each dollar of your budget accountable. The more dollars you put to work for you (towards making more money) the better off you will be in the long run.
5. Pay off Bills. Debt is truly the enemy. If you have debts, I would recommend using some of that new found money to get rid of those debts in one of the following ways:
- Use a debt snowball to pay down your debt fastest. Adding a car payment to a debt snowball will help you make huge strides towards becoming debt free.
- Split the car payment between savings / investing and paying down debts using the debt snowball. Do everything with balance. If you become debt free and do not have sufficient savings, you may find yourself in debt again, should an unexpected expense occur.
6. Put the More Money Towards Your Retirement. For me, when I was looking at having two cars paid off (about $800 per month) I asked myself two questions about our retirement funds:
- How is my retirement savings tracking? Sadly, I had made some poor decisions several years ago which depleted my retirements savings significantly. Isn’t it amazing how much we learn the hard way? Some of the financial decisions I have made in the past, I will never make again, but sadly I just didn’t know better at the time. Due to these decisions, my retirement accounts are not where I want them to be; or where they need to be for my wife and I to retire well. The good news is that we do have them and they are growing.
- How much can I afford to put towards my retirement savings vs. how much debt do I need to pay off? The good news is that we have most of our normal consumer debt paid off. I don’t count my wife’s student loans and I am pretty sure we would not put extra money towards paying those off up against growing our retirement accounts based on the low interest and the fact that we won’t have the opportunity to make up pre-retirement earnings if we miss the opportunity to invest.
The first decision I made was to increase our “overfunding” of our Infinite Banking account for a few reasons. First, we have access to those funds if we need to borrow them and second it does help grow our retirement nest egg. If you don’t know much about the power of Infinite Banking, I strongly encourage you to read this article and get the book, Becoming Your Own Banker.
The second decision I made was to diversify my retirement savings by opening up a Wealthsimple account.
You need to decide what the best investment vehicles (no pun intended) are for you based on your age, retirement goals, risk tolerance, and a host of other factors.
7. Create a Vacation Fund. Did you know that saving for vacations is just as important as saving for other things such as retirement? We aren’t supposed to live to work and work to live, we are supposed to work to support a life we love and enjoy time with friends and family, and that requires downtime. If you aren’t taking enough time off, you might not be saving enough for your vacations, so this might be a way to find that extra much needed money to do so.
I hope this truly helps people see car payments in a new light. Most of all, people need to know that having a car payment does not have to be a part of a standard budget or a way of life. For many years I never had a car payment, but in my late 20’s I bought into the “car payment culture” and sometimes it’s a hard trap to get out of (I went on to have car payments for the next 15 years.) I am thankful that I have a new perspective which gives me more passion for true financial freedom, financial security, and enjoying time with family and friends. And I now enjoy seeing a budget without the near $800 car payments (for two cars) that the once we had.
This article was also featured in the Carnival of Personal Finance on July 22, 2013.