Monday, March 13, 2006The Family Car
Car related expenses in particular, have the potential to bring about a financial crisis even when you thought things were sailing along pretty smoothly. Here is how you can be free of ever having another predictable car-related financial crisis. There will always be unpredictable things in life, and this plan will not cover every scenerio that could come up. It will however give you a good plan to allow for maintaining and repairing and eventually replacing your car.
First, revise your budget, allowing $100 per month for car maintanance. This could be money that is currently going into some form of savings.
Second, open an interest-bearing bank account called CAR SAVINGS and have the $100 per month direct deposited into this account. If you have any additional money laid aside, use it to give the account an initial boost, but in the future, just the $100 per month should do. Now, whenever you spend money on anything from oil changes to license plate renewals to getting new brakes, it will come from this account.
Third, if/when the account gets $2000 in it, it is now full and the overflow is yours to do other things with as you see fit. If you are striving to drive the car into the ground, you might increase that amount as the car ages.
Fourth, since the car won't last forever, you also need a plan for purchasing another one some day, if that is a priority.
You need not borrow money to buy a car now that you have a healthy CAR SAVINGS. With this cushion of money to look after repairs, it suddenly seems plausible to keep the old clunker longer than you had planned. If the car is paid for, decide how many more years you can realistically keep it running and how much you will spend on the next one. Now do the math to determine how much you need to save each year. You could break it into a monthly amount if you wish. If you are used to making a monthly car payment, and you think your car can survive 5 more years, the amount will likely be a bit less than what you are used to paying. In our case, we use our tax return every year instead of a monthly amount. If the car you have is not fully paid for, you need to trick yourself in the sense of pretending your payments are a bit higher than they really are, but putting aside the extra for your future car savings. In this way, once your car is paid for, you will have shaved some time off the additional years you would need to keep it in order to save enough cash for the next car you buy.
Fifth, deposit the money somewhere that you won't be tempted to touch it. Remember, this money is not your emergency fund for other things that come up - it is specifically for keeping you out of car debt in the future, and for making sure that you aren't thrown into a financial crisis.