Car Replacement Budget Strategy?
I'm a bit far off from this yet (early '21 I should finish off the car), but I know it is recommended by some to keep budgeting a car payment monthly after paying off your car to prepare for the next one (to either buy outright or at least have a good down payment ready). What is the general guideline on how much to make that payment? Do you budget the same amount you currently do, assuming that the next car will be approximately the same cost/payment as the current one? Do you budget a little less to free up some of the funds for other things?
What are your thoughts?
I wound up with less than the payment but I wish I had always been able to do the full payment amount! I had to start lower because my student loans came out of school deferment & grace period after I went back to school, and I haven't gotten it back up to what I had been paying yet (after several years). And I occasionally had to raid it to cover a larger car repair, and then paused adding more in 2018 while I was sasaving for a down payment on a house. So while I have a decent amount set aside, to get a car I would be happy with would still take a loan.
Anything you can do is better than nothing though!Reply
I come from a family where we drive our cars until they die on the side of the road one day. So 10+ years. On the one hand, it makes all the upgrades and new features super exciting. I went from a '98 Accord with a tape deck and no CD player to a '15 Mazda 3 with a CD player, aux input, and USB connections (in fairness, I sold the Accord in 2012 and moved out of the country and was carless for 3 years). On the other hand, I would expect prices to go up a lot over that span of time so to get the same price, one would have to essentially down grade. But like adriana01 said, something is better than nothing.Reply
Figure out the out the door cost you'd spend on a car now (including tax, tag and title). Figure out how many years from now you want to buy the car.
C = Cost
Y = Years
I = Inflation percentage as a decimal.
Figure out your inflation adjusted cost...
C * (1 + I)^Y
To figure out the monthly, take that result and divide by 12*Y
So for example, let's say you want a $25k car out the door price today in 10 years, and you expect 3% inflation.
Future cost = $25k * (1 + 0.03)^10 = 33,597.90
Monthly amount = 33,597.91 / (12*10) = $279.98 (so round to $280 or maybe even $300)Reply
I don't know that there is a general guideline. nolesrule lays out the theory pretty well. I didn't do this as rigorously as he describes. What I did:
Bought a car in 2007, 2 months before starting to use YNAB. Wanted to make it last 10 years. Paid ~$13K, estimated that a new car in 2017 would set me back ~$18K even if I was conservative and wanted a small car.
Didn't have a budget for Car Replacement originally, as I was budgeting paycheck to paycheck and whacking a lot of moles for a few months. When I caught up, I reasoned that I should be budgeting $150 per month = $18,000 / 120 months, and extra to catch up to where I ought to be on a straight line if I'd started when I bought the car.
IIRC, it took a couple years before I was caught up and consistently budgeting $150 per month for Car Replacement. In the middle of the decade, I needed to use part of that category to replace a car totaled by an uninsured motorist before the insurance reimbursement arrived. The insurance reimbursement essentially made the category whole.
9 years and 11 months after I bought that car, my daughter's car died. I had been thinking that 2007 Hyundai would last me 2 or 3 more years, but I decided to gift it to my daughter so she could still work, and buy a new car myself one month earlier than originally planned and 2-3 years earlier than recently planned. I WAMed $150 from Unexpected Expenses to Car Replacement, and went car shopping on 3 days' notice.
Having that hard cap on the category made me a less bad negotiator. I walked out of the dealership with an agreement to buy a new 2017 Honda Fit for a total of $17,975.50 including all taxes and dealer fees. The salesman could negotiate to an "out-the-door" price. Who knew? I sure didn't.
Came home, and estimated I'd need ~$24K to replace this car in 10 years. Started budgeting $200 per month = $24,000 / 120 months to Car Replacement. My credit score still cites "lack of installment loans" as an explanatory factor for my score. I don't care, I'd rather not pay interest for a higher credit score.
It's possible that I may need to spend more than $24,000 to replace my car when the time comes. If that seems obvious sooner, I'll adjust my budget according to new information. If the car looks like it will last more than 10 years, I'll plan to keep driving it and letting funds build up in Car Replacement. Life Happens, and I'll need to adjust when it does.Reply
I am in the same boat. I had a paid for car (which was nice) but it was really old and run down, so when it needed a $1,100 repair I decided to get rid of it, and I could have got another super cheap car by dipping into my emergency fund but I figured that would just end up in another large repair bill sooner than later and I have good credit so I bit the bullet and financed one worth about $5000 which I figure should (hopefully) last at least another 5 years. I got it on a 4 year note which I am doubling up my payments and will have it paid off in early 2021 as well. My plan then was to continue to put the same payment amount into the new card fund for about another 2 years beyond that so that by the time I've had this one for 4 years, I could buy another $5000 car this time in cash. Then I plan to continue saving that amount this time for 4 years so my next car after that could be a $10,000 car paid for in cash, and just slowly work up to a good paid for car that's only 1-2 years old when I first get it.
Well that's my plan anyway we'll have to see how well that actually works out for me.Reply
nolesrule Patzer Ok that makes sense. I hadn't even thought of inflation, that changes calculations a bit.
I think the idea of setting aside the same payment amount would assume that your current vehicle lasts at least X number of years after you pay it off, where X is your current loan period.
So if you currently have a 5 year loan, as long as the car lasts at least 5 years after you've paid it off you should have close to the same value saved up again for a new car. Of course, this also ignores any down payment amount from the current car and inflation.
So considering all that, I'm thinking the logical thing to do would be to set aside at minimum the current payment amount (assuming you plan to buy a similarly price vehicle), and then maybe reduce it (but not stop altogether) once you save up the amount calculated for a similar replacement (sticker + tax + inflation).
At best, the current car will last long beyond that point and you'll be able to buy the replacement outright. If something happens after you've paid off the car but before you've set aside the full amount, you'd hopefully be able to either buy something more modest, or put down a decent down payment on something similar and be a bit ahead.Reply
I thought 60 months was long, but many new cars are being financed for even longer now!
I know and I think it is kind of crazy. My stance has been if you can't afford it in 36 months, you can't afford it period.Reply
I'm still saving $100 a month towards a new car even though we just bought one last November. When we're done paying for that in just under 3 years, I want to just roll what we are currently spending on the payment to the new car replacement fund as well. So $100/month for 3 years then about $440 a month for ??. With any luck the next car we replace will be our Honda Civic and not our 7 passenger SUV. We had to replace the transmission on the Civic a couple years ago at 15years - my husband wanted to replace it instead. We still had a payment on our SUV and I didn't want two car notes so I had to tell him we couldn't afford that without severely adjusting our lifestyle. $2000 is still cheaper than a new car. Just like when we had TechniCub#3, we bought new car seats instead of a new car. We had to buy three $200 car seats but by god we got three carseats in the back seat of our Honda. $600 worth of car seats is still cheaper than a new car.Reply
bevocat I'm familiar with CPTSD . . . uncomfortably familiar. :( So, first of all, you ARE awesome! Sending all the love and strength your way. ❤️
My 10 year old car has been paid off for about 4 years. For the first couple years I found other things to do with the money that was going to car payments. Then, about a year ago I was in a hit-and-run, and thought my car was totaled. During the panic attacks that followed the event, I freaked out about my budget (surprises suck, amirite??). I investigated car buying options and couldn't imagine how I'd find the money for a car payment again. Somehow, miraculously, my car survived and I breathed a bit easier, but decided to start a separate savings account called "Car Payment" - - I know, YNAB would say just create a budget category, but I like having this totally separate, even list it as a tracking account instead of budget.
Now I feel more confident in my ability to adapt to a monthly car payment, should the need arise, and I'm also amazed at how quickly the account has grown, and feel confident about paying for inevitable repairs to keep it on the road. Best of all, I didn't do any of the math listed in comments above..... Just planning to roll with the punches. ;-)Reply
We got a new car last fall. This spring one of our cars got damaged by a company van backing into it. We were in the process of deciding whether to donate it or sell it. The company owner asked if we'd take care of it privately since the damage was minimal. Long story short, I just deposited his check, still own the car (it surely would have been junked by his insurance since it's over 20 years old), and still could sell it for $500 as is. Every penny of that check went into our car replacement fund. Granted, it's not a huge amount towards a new vehicle but we absolutely got our money's worth out of that car in the last umpteen years. We drive our cars into the ground barring accident.
Now, I just need to make sure it's sold before registration and insurance are due...Reply
I just did this and I *just* managed to get to the amount. I'm another one who drives cars till they literally die and have to be towed away (in fact, the last one was towed away, resurrected by the mechanic, and then later towed away again!)
Knowing it wasn't going to last much longer I assumed two years, and assumed paying the same amount as I paid for this one, and set that as a goal.
As it turned out it lasted half the time but I got one for half the price, so I was 100 short of what I needed, but that was 500 closer than I would have been if I hadn't bothered.
On long term goals, at my school parents have to pay the fees for the external (leaving school) exams. My neighbours just paid 1000kd (over $3000) for their son to sit his exams. I immediately set a goal for that amount in 7 years' time! I really hope to have left the school and the country far behind us by then, but just in case 😇Reply