New cars are one of the worst purchases that we can make due to the rapid decrease in value, especially over the first three years. When we finance these vehicles, this turns a bad situation even worse. We have now added a couple thousand dollars in interest to the cost of a depreciating item.

Used cars are the answer to avoiding this big hit in depreciation, but many people still finance the used car. Let's take a look at how you can buy used vehicles even when you have very little to start with.

Let's assume you wanted to purchase a 2005 Accord for $20,990 and financed it for 6 years at 5.95%. The payment would be $341.85 per month for a total amount paid over the life of the loan of $24,613.40. That includes $3,623.40 in interest paid.

Since you had decided that you could afford the $341.85 payment to the finance company, we assume that you can afford to pay yourself $341.85 into a savings account.

We round off this savings and do not account for any interest and assume that you save $4,000 each year. We will also assume that you can drive your current jalopy for one more year while you save this money.

January 2006 you now have $4,000 saved and can afford to buy a 1992 Honda Accord.

January 2007 you can sell the 1992 for $1,400, add another $4,000 to it and buy a 1995 Honda Accord.

January 2008 you can sell the 1995 for $2,000, add another $4,000 to it and buy a 1997 Honda Accord.

January 2009 you can sell the 1997 for $2,300, add another $4,000 to it and buy a 1999 Honda Accord.

January 2010 you can sell the 1999 for $2,600, add another $4,000 to it and buy a 2000 Honda Accord.

In January 2011 you have reached the value of used car purchases where selling the 2000 and adding $4,000 to it will not substantially upgrade your car, so you continue to save.

January 2012 you can sell the 2000 for $2,400, add $8,000 (two years of savings) to it and buy a 2006 Honda Accord.

Now we can compare the two decisions. If you had bought the new 2005 you would have a paid off 2005 in 2011 and you would have paid interest ($3,623.40 to be exact) on top of the purchase price. Using our example you could have had a 2006 one year later in 2012 completely paid off and your money made interest for you while in your savings account.

These numbers are all conservative and you could do much better by continuing to save and delay your used car purchases longer than one year. This would be the best thing to do so that you do not keep losing value on selling cars.

For example, if you kept saving and bought a used car every two years you could have bought a 2008 Honda Accord in 2012 completely paid for. When you stretch out your used car purchases while continuing to save, you can purchase much newer vehicles. With this method you can always purchase newer used cars and never pay interest to anyone.

The key to making this work is the disciplined savings. If you have decided that you can make a new car payment, you can put the money in a savings account earmarked for used cars.

Also remember that since you do not have a car payment, if you have a financial problem like a job layoff etc., you will not have to worry about losing your vehicle. Driving paid for used cars is a wise financial practice. It is said that it is the millionaires that purchase and drive used cars. It is those in deep debt that drive new and leased vehicles.

The prices for these vehicles all came from Kelley Blue Book. The purchase prices are just under the KBB retail value and the selling prices are just over the private party value. The values that I used were conservative and you could do much better, especially if you hold onto your vehicles longer while continuing to save.


About the Author
John Cook is the author of Finance For Families.com, a website designed to assist families in making smart financial decisions. The burden of seemingly insurmountable debt is destroying too many families. You can read more at http://www.financeforfamilies.com.