2005 - Issue 6

Make Car Payments to Yourself!

Take a look at any car dealer advertisement and you will immediately notice that most of the time cars are not listed by actual selling price, but by their monthly financed or lease payments. This effective marketing strategy recognizes that many consumers evaluate purchases based on what they can afford monthly rather than by looking at the total long term cost.

Buyers often fail to consider that whether they pay cash or finance the car, the actual cost of the car is the same. The difference is whether they earned interest (good) or paid (bad) interest on the funds. Paying cash for the vehicle implies earning interest and financing implies paying pay interest to a bank or other financing institution. Which would you rather do earn interest or lose money to the bank?

For example, financing the purchase of a $20,000 car at 6% interest over 5 years would equal a $386 monthly payment for a total outflow of $23,160. Part of that payment is for the $20,000 cost of the car and the remaining $3,160 is interest. Alternatively, if 5 years ago you deposited$309 a month into a savings account earning 3% interest, you would have saved the $20,000 purchase price. Because of the interest accumulation, the actual amount deposited into the savings account was only $18,562. In essence, your $20,000 car only cost $18,562 ($309X60). Another way to look at the cost of borrowing is comparing the monthly financed payment of $386 to the monthly savings deposit of $309. Other factors, like taxes, enter into the comparison, but the example illustrates the benefits of saving for major purchases.

If you are not currently paying cash for your cars, consider making car payments to yourself now so that when the time comes for the next vehicle purchase, you can write a check.

For many of us, automobiles are the single biggest purchase we make other than our home. However, these saving guidelines apply for any major purchase that you anticipate within the next five years or so - home repairs, remodeling, etc. If you need to make a major purchase quickly, and do not have the time to save the entire amount, sometimes borrowing is the only option. Once you have paid off that loan, apply the amount of your previous monthly payment towards a major purchase savings account. Over time, you will finance less and less and ultimately eliminate that nagging consumer debt. .

You are going to make car payments either to yourself (savings) or to the bank (payments) - start now to build up that car fund or other major purchase account.

Tips, articles and other useful information

This article from the Certified Financial Planner™ Board lists practical tips to consider for major purchases.

This savings calculator can help you determine how much to save for your next major purchase.

In the news - current issues that affect our personal finances

This article from marketwatch.com suggests that we have not seen the last of interest rate increases, which can have a positive and/or negative effect on "savers" or "borrowers." "Savers" can benefit from higher rates in short term savings accounts. "Borrowers" need to lock in rates before an increase or, better yet, eliminate debt altogether.

Who We Are and How We Can Help You

The Everyday Steward division of Ronald Blue & Co. (RB&Co.) is a unique part of RB&Co. Our vision is to serve a wide range of Christian individuals and couples who have a desire to be better stewards of their God-given assets. Our group provides an affordable option for those desiring professional financial counsel, or to have their investment assets professionally managed. Learn more...

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Resources

www.consumerreports.org – Given the challenge of saving for that next car or other major purchase, it is important to make sure that items we buy now will last a long time. The Consumer Reports website is a great resource to research most any item you are interested in purchasing. Subscriptions are monthly or annually at a reduced rate. If you are interested in researching only one specific item, subscribe monthly and then cancel the subscription once you have completed your research.