Baby Step 2 - Living Without Auto Loans

In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.

I will continue on my anti-debt soapbox this week because I love to hate debt so much. I promise - I will eventually move on to other topics. The question this week is, "how do I get a car without a loan?" Believe it or not, it is possible to live without a car payment. The key here is distinguishing between wants and needs. You might want a car that turns heads on Main Street, but you probably just need a car that will start in the morning and get you to work safely.

If you are really starting from scratch (and most of you aren't, so it will be even easier than this scenario), you can find a car that runs for $1000 or less, which most people could come up with fairly quickly. I'm not suggesting you drive a $1000 beater forever. The average car payment is around $500/month. Let's say that instead of having a debt payment, which includes a lot of interest, you put $500/month into a savings account. Within a year you could pay $6000 cash plus proceeds from the beater for quite a respectable car. Another year would give you $12,000, and so on until within five years (the average length of a car loan) you could pay almost $30,000 cash for a car that would turn heads.

5 years of $500/month payments at an 8% interest rate could purchase a $24,659.22 car, which means having a car payment cost you over $5000 in interest during that time. Furthermore, the average person will finance another car for another 5 years at the end of the loan term, thus continuing a lifetime cycle of car payments. If you put that $1000/year toward retirement savings at 10%/year instead of interest to the bank, you would have almost $500,000 extra after 40 years. Why not sacrifice for a short time and save your family from a lifetime of car payments that eat away at your ability to build wealth?

If you have any questions or comments, please email me!