- After I totaled my first car, I bought a 14-year-old Honda Civic with 144,000 miles for about $US5,200.
- I could have taken out a loan to buy a nicer or newer car, but instead I made do with the Civic while making a “car payment” into a high-yield savings account for the next three years.
- By the time the Civic died, I’d made about $US360 and saved about $US11,000 for my next car, a Honda Fit.
- Over the life of a car loan, I’d have paid more than $US500 in interest to buy that same Honda Fit. Instead, Iearned over $US350 towards that car by saving ahead in a high-yield savings account instead of paying on a loan.
- Read more personal finance coverage.
A few years ago, I had received an 11-year-old Honda Accord from my grandparents that I was ultra-grateful for. It was a very valuable head-start in my adult life, when I needed a car for work. When I totaled it four years later on an icy road (I was very lucky to escape unharmed), the insurance paid out almost $US4,000, which gave me a couple of options.
I could have made the $US4,000 a hefty down payment on a very respectable new or used car and taken on a few hundred dollars a month of car payment. However, I had some money saved, and I didn’t like the idea of having to pay interest on a loan.
I knew I’d need another car in the future, so I planned ahead
This time, I did something smart to prepare for the next car down the line: When I got the Civic, I began saving $US300 each month in my high yield savings account as an approximate “car payment.” I chose $US300 based on car commercials and a little light internet research, figuring it wasn’t the highest or the lowest car payment, but right about average. There were months where I couldn’t swing that much, but if I had extra to spare, I’d try to make up for it during another month.
I put that money in my Ally Bank savings account, which earned about 2% interest (the account’s rates fluctuate with the market) over the three-year life of the Civic. I made about $US360 and saved about $US11,000 for my next car.
The Civic was not beautiful, but Hondas have a reputation for a substantial lifespan. I ended up being able to drive the car for three years, putting another 55,000 miles on it with my substantial commute. With 199,000 miles, no air conditioning, and a couple pending repairs that were going to cost more than the value of the car, I ended up trading it in to get my next car.
My high-yield savings account ultimately saved me money
Over the life of a car loan, I’d have paid more than $US500 in interest to buy that same Honda Fit, based on a used car interest rate of around 4%. Instead, I earned over $US350 towards that car by saving ahead in a high-yield savings account instead of paying on a loan. The swing of $US850 would be even more if I was considering more expensive cars.
In the future, I’d be willing to choose younger or nicer-looking cars, but I hope to always save the money ahead of time, if possible. Even if I have to take out a car loan, I hope to have some money saved as either a down payment or a little “car emergency fund” for surprise repair needs.
I realised that, even if it means living with much less nice cars for a while, I’m proud to work to pay cash for my car. I recognise that I got a lucky break from my grandparents that let me start this process, but I believe that, by buying a less-nice car and saving a little on the side, this same strategy could work for most of us.
My savings strategy hinged on my willingness to wait
To us this strategy, you have to be willing to, at the beginning, live with a less than beautiful car. This isn’t for everyone, but I was able to make it work for the three years I had my Civic; while it had a few repair needs, it was mostly a reliable form of transportation.
There were some really sweaty commutes with no air conditioning to get to the point where I was ready to buy another car. After I traded in my Civic for a much-younger Honda Fit, I felt like the sacrifices in comfort and style had been worth it. I spent about $US8,500 on my 6-year-old Honda Fit with 46,000 miles, getting $US500 in trade-in value for the Civic. The Honda Fit has been my most reliable and low mileage car ever, and I was able to buy it in cash.