Sep 17 2008

How to ‘Drive free, retire rich’

Toy Car Story

(Photo: Mike Haslam, used with Creative Commons license)

I was visiting Dave Ramsey’s site this morning and came across this excellent video to show you how you can drive without making another car payment.

All you have to do is stay committed to driving a less expensive car for just a little while, and continue making those regular car payments to yourself once the car is paid off.

  1. Pay off your car loan as fast as possible.
  2. Continue making those same monthly payments to yourself in a high-interest account. The video suggests you can get a 12% return if you put it in a good growth mutual fund. If you’ve been watching the news lately, you know that kind of return is just not gunna happen. But, you can get at least 3% in high-interest savings accounts, and some CDs are doing better. Rates will go back up eventually.
  3. After about 10 months of paying yourself your car payment (they say the average is $475/month), you’ll have $4,750 plus interest in cash. Add that amount to the value of the car you’re currently driving, and you can have a pretty decent upgrade in a short amount of time. Say your car was worth $5k. You can get into a $10k car in 10 months without taking out a car loan.
  4. Keep paying yourself $475 for another 10 months, and you’ll be able to move up in car once again.
  5. Eventually, according to the video, if your “car fund” is left alone and is able to grow at a good interest rate, you won’t have to contribute to it anymore. The interest alone will be enough to buy a new car with cash!

Whoopee! Sounds like a great deal to me.

Shane and I have a car loan right now. It’s not fun. Our payment is $277/month and if we never make an extra payment, we’ll still have the loan for a little more than three years.

How about, “No thanks to that!”

I’ve been crunching some numbers, and it looks like if we buckle down, we’ll be able to get that thing paid off by the end of 2009–and sooner if we get ultra-serious and also have a few things go our way. Like um, if my baby is born in 2008 instead of 2009, we’ll get a decent-sized tax refund this year. He can be born whenever he wants, but I’m just sayin’…

I’m really excited to live without a car payment ever again. Our car is just a 2006 model and has about 20k miles on it. It ought to last us at least another five years, and perhaps longer if we use it as a secondary vehicle.

In my left sidebar, you’ll see that our extra money is being tossed into our “baby fund” right now. I want to have some cash saved up to use to buy things before our son is born–things like the car seat, crib, etc.

On paper, it looks like we’ll have that fund completed in just a few weeks.

As soon as that happens, we’ll start attacking our car loan. I’ll update my progress bar tracker to keep me motivated. I’ll also need to call our bank to find out if I can make unlimited extra payments per month, or how to go about it. Also, I want to make sure my extra payments are going directly to the principal of the loan.

Can’t wait!

What do you think of living without a car loan? Is it possible or a bit too far-fetched?



27 Responses to “How to ‘Drive free, retire rich’”

  1. It is absolutely possible. My hubby and I both have paid off vehicles. We keep them well maintained and they will last us a long time. The truth is, most people really only need an around town car. The key is, if you are focusing on buckling down on debt, to view your car as transportation, not a status symbol.

    Now, don’t get me wrong, we have two paid off cars, not because we couldn’t get a car loan, but because it is nice to get into a car and know that it is working for you, instead of you working for IT.

  2. I think it’s totally possible! We bought our car brand new last year, and we’re taking super good care of it. We plan to drive it for as long as we possibly can.

    If there comes a point where we need a second vehicle, we plan to save up and buy something used with cash.

    This plan seems really smart. I’d like to try it. Personally, I think the people who can’t live without a car payment are really people who can’t live without a new, luxurious car. I just want something that’s going to get me to work and back and isn’t going to cost me a fortune in gas!

    Karen’s last blog post..Life without a microwave

  3. I think it is very logical and very possible to pay off your car. We have two car payments, one is mine and the other is the hubbys. We put a huge amount down on the hubbys back in August, bringing us to a little under a year till it is paid off. I plan once that his car is paid off to take what his norm payment is/was and apply it to my car every month. If everything goes according to plan, we wont have car payments come March 2010. It is a nice thought and considering car-payments tend to be the biggest bill (excluding mortgages/rent) in most homes, it will be a relief!

  4. You can do it!

    I’ve never had a car payment. I’ve always driven older used cars and never paid more than $5000 for one.

    The money freed up by not having that payment is so worth it!

    Emily’s last blog post..Little Reminders

  5. I think it is doable with planning–although trickier with 2 cars to maintain (living in midwestern suburbia w/ 2 kids makes 2 cars a necessity). We’ve managed to time it so that we only ever have one car payment at a time (and never $475! seriously? that’s average? that’s crazy). Next goal: pay upfront instead of getting a loan at all!

    Michelle’s last blog post..Can you hear me now?

  6. I’m also shocked that $475 is average… I did buy my car used, but it still wasn’t cheap. I thought my $230 car payment was expensive… $475 is more than I pay for rent!

    My car is about $950 or so away from being paid off… I’m getting excited logging into my bank account to see that number dropping. When it’s paid off, my extra cash will go for the credit card bills, but when I’m free of those I definitely want to start putting some money away for the next car. I don’t really care for the idea of trading, trading, trading every couple of years, but I would like to be able to buy the next car for cash, or darn near close to it!

    Jennifer’s last blog post..21, 34, and 79 Crossed Off

  7. Thanks for this blog post. I’m working with a friend in the car biz to sell my car and get another with the “equity” I have in it.

    The car might not be as nice as my current one but it will allow more to be put towards debt. The problem will be that the extra car payment money wouldn’t be going into an acct to save for a different car. I figure that can be done once the debts have been paid.

  8. Thanks for sharing! I just passed this along to my husband, and hope that we can put this advice to good use. :)

  9. I LOVE the video from Dave Ramsey, and I totally think it’s possible. I am sure many people think we are insane for driving a car that was barely driveable for years as we saved to pay cash for a replacement–but now we have a nice, reliable car that has no car note. We have a small loan that we acquired because of a bad car crash where we had to replace the vehicle quickly, but it was only a 2-year loan to begin with, for an amount we could pay off immediately if something happened, and I try to make extra payments. And it has a very low rate from a credit union.

    I think many people our age are SO concerned with having what their parents have now–despite the fact that the parents worked 30 years to get there–that they go in deep debt. It drives me insane.

    Hopefully you WILL get some of those baby things at your showers! I have been so blessed to have many things given to me, found at a deep discount, or received at showers. Yahoo! Put that money away for diapers!

    Sorry for the book. ;)

    Jessie

  10. It is absolutely possible!

    My boyfriend and I just went through Dave Ramsey’s FPU and we are so ready to attack the plan before marriage. I have had a paid off truck for about a year now, and although the gas can get pretty expensive it is still way cheaper than getting a newer car.

    My boyfrined just bought a $4500 car and is in the process of selling his truck to pay off the loan, which will leave him debt free other than the house.

    I am totally debt free. If you’re not there do whatever you can to get there. Work extra jobs, have a garage sale, whatever it takes- it is SO WORTH IT!!!!!!! It took me about 18 months to get there. I choose how to spend my money now, not the other way around.

  11. Maybe $475 is average for people who have two car loans? Or then again, that’s about how much it would cost per month to get a $25-30k brand new car. Either way, it’s a lot!

    I don’t think I’d want to get a new (to me) car each year, or even every two years. That’s a big hassle when it comes to finding it, negotiating, getting it registered, titled and insured.

    But, if I was driving a beater with a heater, you betcha I’d want to upgrade outta that as fast as possible!

    Or, if our family simply outgrew a car. We’d wanna upgrade, of course.

    If I can get away with it, I’d like to drive a car for 10 years or so. Too much longer, and I’d probably have to deal with major things breaking and the stress of knowing if I was getting a good deal or not at the repair shop.

  12. Its what we are doing. We could easily get a car loan but I don’t want one. We have a 1997 camry that is fully paid for. We’ve had it two years. We just finished doing repairs on it that are standard for its age.

    We are having our third kid in early 2009 – its a tight inconvinient squeeze but we are not upgrading our car. Every month more unexpected expenses keep hitting us so I’d rather not commit to a monthly payment on a car that would ruin our flexibility. We pay ourselves a monthly car payment but its been real slow going.

  13. I highly recommend living without a car payment. And also agree with the other commentors — people that don’t think they can live without a payment clearly want much newer, nicer cars.

    Our only debt is a mortgage payment and even that seems stifling at times. We are working to pay it off as quickly as possible. I could not imagine adding a car payment to the mix. EEEEK!

    It is a terrible feeling to have most of your money go towards paying debt every month. Debt really is spending tomorrow’s prosperity today.

    Trixie

  14. My mom actually sent me this video a month or so ago, and I loved it. I believe that it’s totally possible. We currently don’t have car notes at this time, and want to start beefing up our car savings fund to keep from ever having a car payment.

    Sarah F.’s last blog post..To vacation or not to vacation

  15. It is entirely possible–my husband and I don’t have any car loans. He bought his car with cash and my parents bought my car on a loan when I was in college. When I graduated, I paid my car off with my unused college savings. (I tried to pay off my car earlier so that my parents wouldn’t be making payments, but they wouldn’t let me. Since I was paying for school, they wanted to make sure I was solvent. I love them dearly for paying for my car those three years.)

  16. I’m 30 years old and I’ve never had a car loan. I currently drive a 1991 Honda Civic with 214,000 miles on it (paid $2300 cash in 2003 to buy it). My husband has a 1990 Audi with 110,000 miles. We’re saving slowly ($200/month) for a new car someday, but we’re also planning to eventually be a one car family. Since both of our cars are old, they cost very little to keep around (each one runs about $400/year for insurance and registration), and we don’t know which one will bite the dust first. But when one does, we won’t be replacing it. We’ll drive the other until that also dies, and by then should have enough money in our car fund to get a new-to-us car.

    Frugal Babe’s last blog post..Frugal Living Makes Goals Easier To Achieve

  17. Sure it’s possible. I have never had a car payment. DH has had car loans in the past, but no longer does. We bought our work truck for cash two years ago, I bought my car for cash brand-new, and we bought DH’s current car for cash for just $1,000(!) and it gets 40 mpg (Geo Metro XFI).

    Our car fund has been somewhat depleted, but we’re working on it again.

    Rachel’s last blog post..Over the river, and through the woods… we’re going camping!

  18. We’re doing it and I love it! We have one loan left (student loan) until we are debt free except for the mortgage. Reading Total Money Makeover did it for me with the car loans. Hopefully we will never have one again.

    Marcy’s last blog post..What do you do when it comes to gift giving on a budget?

  19. GREAT article. I am so close to having my car paid off I can taste it. Less than a year…$400 payments every month are going to go into a fund that we’re going to use for our future home and land.

    Or…we’ll use the additional $400 to start making extra payments on my hubby’s car. I can’t wait! :) I still am kicking myself for buying a brand new car. Not that I don’t love my car but I certainly didn’t need a car payment. I won’t be doing that again.

    castocreations’s last blog post..Wow…Sometimes God Makes Decisions Easy

  20. Our car is paid off, but we aren’t putting the money we were paying away into a fund to replace it (our housing expenses have expanded, along with the size of our place).

    It feels good not to have a car payment, but sooner or later the car does have to be replaced.

    This is still something we have to figure out.

  21. This sounds possible as long as you stay motivated and don’t stop putting money in it or worse spend that money on something else. I would be interested to see how other people have faired doing this and then when I go to get my next car I will consider this.

    Also I really like your idea of tracking your progress on here. Not only is it good motivation but you have the support of tons of other like minded people. Stick with it!

  22. It is probably quite possible. I have always leased my cars which was good for me in that I rarely had to worry about my car breaking down but is a complete waste of money. My husband, on the other hand, has always bought used, never had a high car payment, and drove them until the repairs exceeded the value – long after his payments stopped. It has always worked out for him. Next time, I might have to follow his path. Good luck and let us know how it turns out!

    Dani’s last blog post..What’s Pork Got to Do With It?

  23. I’ve seen a similar video and although I do think it’s possible, I believe it would take way too long. Especially with the market the way it is right now! My car would probably break down and die before I had enough saved for a new car.

  24. My husband and I both drive older model cars that are PAID OFF. We haven’t had a car payment in about 4 years. It is absolutely possible. You can’t have a brand new car (unless you are a millionaire), but it is definitely doable to not have a car payment. We aren’t the best at putting a “car payment” into savings though and we will be needing a mini van soon, but I so do NOT want to ever have a car payment again. So we are going to have to get creative and work some serious overtime!

    Gretchen’s last blog post..Take a Break Thursday . . . Classic Movies

  25. Totally possible! I do it myself. I have a 1998 that I keep in good condition. I have been making car payments to myself for quite awhile now and currently have enough to upgrade. It is wonderful to have the peace of mind that I don’t have to go into debt when my current vehicle dies.

  26. It is possible and we just bought a new-to-us Toyota Minivan in cash!!!

    We had paid off both of our cars back in 2004 – and we wanted to pay for our next car in cash. One of our cars “died” in October of 2007 and we survived with one car until August 2008! I am a SAHM and I have a 2 1/2 year old and an 8 month old – I felt a little stir crazy at times, but with our goal in place, I knew that I could last until we were able to buy our car with cash. We actually did not have enough in the budget to put aside each paycheck, so we saved from things like my husband’s “extra” paycheck – we plan our budget on 2 paychecks/month (except for food and gas) – so, since he gets paid 26 times/year, we end up with 2 extra paychecks. We also used a bonus that he had, our tax refund and the stimulus check – plus some money that we had set aside about 2 years back. All of that to say, we are living proof that it can be done. God is good – he provides and gave us the strength and endurance to reach our goal! :) (I should write a post about this!)

    Promises Fulfilled’s last blog post..Fun in the Kitchen

  27. We bought a used car (’05 civic) last November and threw all out money at it and paid it off in August. We LOVE being car payment free, and we expect to hang on to this car for at least 10 years, if not longer!
    We are probably going to start making small “car payments” to a savings account in about 5 years, but for now, we are enjoying not having that payment, and we are throwing the money towards student loan debt now.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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