Making Plans and Achieving Goals

Pay Yourself a Car Payment

Pay Yourself a Car Payment

Cars are like a financial sink hole and can really put a damper on your journey to financial independence.  They are expensive, they wear out and they depreciate in value rapidly.  People also tend to buy way more car than their budget would allow because the payments are just so reasonable.  We bought a new (gently used) car this time last year and paid cash for it which I think everyone should do.  However, we are still paying ourselves a car payment every month.

What Got Us Started

I got my Chevy Blazer in high school for an absolute steal.  It belonged to a doctor who only owned the car so he would have something to drive when in snowed.  And, in North Carolina, that is about twice a year.  He was retiring and said he didn’t plan to ever drive in the snow again and was just happy to get rid of it.  That was an awesome car that got me through college, some road trips to Boston, Mont Tremblant, Canada, and one exceptionally painful snowboarding journey to Breckenridge, CO.

Spring Break in Mont Tremblant

Nine years after I bought that car, I was married and in the process of buying our first house.  Coincidentally, it was at that exact time that my car started to completely fall apart.  It is like there was a system shut down sequence that got activated when the car hit 200,000 miles.  Windows quit rolling up, AC went out, alternator, wheel bearings, and the final straw was driving down the road at 50 MPH and losing all break pressure.  Luckily, the emergency brake still worked.

That put us in a tricky situation.  We needed a lot of cash for the down payment on our house and a lot of cash for a new car.  I really hated to do it, but we decided to drain our emergency fund (which was about $10,000) and bought a Honda CRV off Craigslist for a decent deal.  It was definitely a little scary to be taking on a mortgage with zero emergency fund and basically zero cash in the bank.  Fortunately, nothing happened in those first few months, but I did learn a valuable and obvious lesson.  Cars break down over time and will need to be replaced, periodically.  Groundbreaking stuff, I know.

Pay Yourself a Car Payment

“Pay yourself a car payment” just means to save a little bit every month for a future car.  Instead of just waiting for your current car to start breaking down, go ahead and start saving now.  When you pay yourself the car payment, it kind of just feels like another bill.  Then, in a few years when you are ready to replace your current car, you already have the cash on hand.

How Much To Pay Yourself

How much you pay yourself depends on your financial situation.  For the most part, people spend way too much on their cars.  I know we have and we regret it.  The vast majority of people should spend around $5,000-10,000.  In my opinion, around $5,000 is the minimum point of being able to get a decent car with some good life in it.  I think of $10,000 as about the max you should spend unless you are debt free and making north of six figures.

Therefore, you should save $50-100 every month for your next car.  Or $75 per month to keep it simple for everyone.  If you keep the car for 8 years, you will save up $7,200 (8 x 12 x $75).  Hopefully, your car is still in working condition and can be sold for around $2,000.  If the car doesn’t run, you will probably only be able to get a few hundred for it.

Where to Pay Yourself

I recommend that you set up an automatic draft that invests the money.  I know this advice is not for everyone, but I like to invest for those medium term goals (5-10 years).  If you could earn 3% interest over the next eight years, you would end up with $8,243.20.  No guarantees when investing, so you are taking on some risk doing this and may come out worse.  Personally, I just hate the thought of my money sitting there earning 0.1% interest in the bank and losing value to inflation.

The easiest way I have found to do this is with Betterment.  You can open an account (no account minimum) and set up a variety of different goals.  Give the target amount you want to save, the length of time available to save it, and it will give you a recommended monthly deposit amount.  It works kind of like a target date mutual fund that gets less aggressive as you get closer to needing the cash.  Also, you are making the cash a little less liquid which can act as a buffer against yourself.  I know some people are quick to “need” something once the savings account starts building up.


Whether you pay yourself a car payment of $20 or $ 200, the point is you are prepping for the future.  Don’t be like most people who pay their bank $300-500 every month with an additional 5% interest as a way to say, “thank you, Mr. Bank”.  Get started saving today as your current is getting closer to its end every day.



20 thoughts on “Pay Yourself a Car Payment”

  • Great advice!!! I definitely love the concept of paying yourself a car payment. Like you I had a great Mazda, although not nearly as nice as your Chevy, that happened to die at an inopportune time. I had to scramble to find a car and was lucky enough to have some help in order to pay it back. If I didn’t have a safety net though I would have been screwed.

    • Thanks for commenting MSM! If I had it to do over I would have bought something for about two grand that I could have driven for six months, sold for about what I paid for it and could have left our emergency fund mostly intact.

  • That’s a good way to do it. Our car is 7 years old and I hope it last 7 more. When it get closer, we’ll have to start saving up for a newer car. I think we can probably start in 3 or 4 years. I love not having a car payment. It is so much nicer than sending money to the bank.

    • Hey Joe! Thanks for the comment and the twitter share. It means a lot to me.

      14 years is pretty doable with proper maintenance on newer cars. Mine is 8 years old and I’m hoping to get a similar amount of life out of it.

  • This is a great concept that I don’t think many people practice. If you combine this practice with buying a car that is a few grand less than your “ideal” car you can really be setting yourself up for success.

    • Thank you for the comment. I agree that the second big piece is not overspending and being okay with getting a car with a few miles and years on it.

    • Thanks for sharing! Good job getting rid of that car payment and freeing up some cash. It is so tough not to overspend on cars and it is a trap most all of us fall into at least once.

  • Excellent advise! I do personally finance a car, but I’m considering downsizing and paying cash for the next one. Beyond that, making the “car payment” I’d otherwise be making to the bank to myself.

    I think one thing people fail to realize is that paying cash for your cash IS an investment. If you pay $10,000 bash for your car, but then are able to pay $500 per month to yourself and invest it, you’re getting a return per month in the form of a car payment AND the interest earned on that payment over time.
    Lance @ My Strategic Dollar recently posted…Your Home Is Not An AssetMy Profile

    • Yes! That is a perfect way to look at it. It is an investment you can make in yourself without risk. If an emergency comes up or you lose your job you can stop making those investment payments to yourself. The bank is still going to want that car payment.

      Thanks for commenting!

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