Your Money: The Missing Manual

by J.D. Roth

According to the National Automobile Dealers Association, the average price of a new car is just over $28,000. Let’s say you put $8,000 down to buy a car at that price, and you finance the remaining $20,000 for 4 years at 9% interest, meaning your payments will be just under $500 per month. At the end of those 4 years, you’ll have paid almost $32,000 for a car that’s now worth $14,000. That’s $18,000 vanished into thin air! There is a better way, one recommended by financial gurus like Dave Ramsey and Suze Orman. Instead of financing a new car, take that $8,000 and use it to buy a high-quality used car. Then, instead of paying $500 a month to the finance company, set the money aside in a named bank account specifically for your next car (see Targeted Savings Accounts). That way you’re paying yourself rather than the car company. At the end of a year, your used car will have lost 15% or so of its value, making it worth around $6,800. You can keep driving it and saving for a new car, or take the $6,000 you now have in the bank, combine it with the used car’s value, and trade in for a car worth $12,800. And if you keep saving, the next year you can trade in that second car for one worth $17,000. In theory, after 4 years of this you’ll have paid out $32,000 — just as if you’d bought that new car at 9% interest — but you’ll be driving a car worth $23,000 instead of $14,000.