A staggering 90% of car sales are arranged through finance. 1Source: ASIC as quoted in ‘Some Features of Car Financing in Australia’, Background Paper 3: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, 2018
This is staggering to me because buying and upgrading our cars are predictable expenses.
One habit of the financially fit is to save for, rather than pay off.
In this way, you earn interest, rather than pay interest. The interest you earn means you get more life out of your money. Paying interest restricts your lifestyle, more than saving does.
Save at the same rate you normally repay
When you save up for your next car purchase at the same rate as what would be your repayment amount, typically you save the changeover cost months, if not years in advance.
You then have the choice to either:
- Upgrade your car sooner; or
- Keep saving for something else
Your free holiday
When you keep saving for what would be your usual loan term you end up saving enough for a decent holiday, as illustrated in the example below.
Note – you have not paid any extra out of your cash flow. What will you do with your extra money?
(If you want to crunch the numbers yourself, e-mail me for a copy of the spreadsheet.)
Understandably for your first car, you may need to get a car loan, due to needing transport very soon after obtaining your driver’s licence. When that applies, the key is to repay the loan much faster than your loan term. Then, immediately begin saving for your upgrade at the same rate you were making repayments.
It is predictable that we upgrade our cars every few years, so plan for the predictable.
Changing your habit will take some effort, so think of how you plan to use the extra savings and use that to motivate you. And if you’d like some extra support to embed new habits consider my coaching.