Tuesday, October 6, 2020

Vehicle Savings


As discussed in a previous post, a reliable paid off vehicle helps you minimize your vehicle expenses and should help increase your monthly savings rate.  According to Experion, the average American’s new car payment is $554 per month.   If you happen to have 2 new car payments, you may be spending more than $1,110 per month on vehicles.  In the graph below you can see the effect of not having a monthly vehicle expense on my personal saving rate.


  A portion of my monthly savings shown in the graph above are used to save money to pay cash for a future car.  Following this practice will enable you to have zero monthly car payments for the rest of your life and will fuel your wealth building.  You may be thinking, “How does this help you build wealth if instead of paying a car payment you are putting that money into a car fund?”  Well, take a look at when I paid off both of my cars.  I paid off both vehicles in 2013 and I didn’t start contributing to a car fund until 2018.  So, I had 5 years where the money went to investing instead of saving for a car purchase.  Once I replace my two older vehicles with new vehicles, I will have another 5-7 years without saving for a new car.  The money I would have put into vehicle savings will instead go into investments.

  The graph below is where my future car savings stand as of October 2020.  If you are wondering where and how I invest the money, I’ll share that with you now.  Since May of 2018 I have $500 automatically drafted from my checking account into a short-term bond index fund through Vanguard.  In the graph there are 2 data points per month, one is my contribution and the other is the interest earned.  I chose to auto-draft so that the savings happen each month on the same day automatically.  I am a big fan of auto-drafting toward any financial goal.  Just set it and forget it.  Make the automatic contribution part of your monthly budget and don’t make adjustments to it.  Auto-drafting will make you a much more successful saver.  I can’t endorse this practice more.  I chose a short-term bond fund because the interest rate was higher than Vanguard’s money market funds.  I am currently getting 1.1% APR on the fund vs. a money market of 0.07% APR.  I know there is more risk with the short term bond fund and you can’t discount risk, but personally I hate saving money and getting no return on my savings.

  Using this slow monthly automatic savings approach toward funding a new car purchase will have an added benefit.  It will help change your mentality towards your current vehicle.  I see my current vehicles as shields against a huge future expense.  These “shields” buy me time to build my vehicle fund.  Each additional day I own my current vehicles, I appreciate them more.  I personally love my 13-year-old Civic and will be very sad when the cost to keep it functional outweighs the benefits of keeping it.  Additionally, the longer the fund has a higher level of money in it, the more interest the fund will pay you.        




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The Real Millionaire

 I am a 39-year-old man with an amazing wife and 4 awesome kids.  I am also considered a net-worth millionaire.  Achieving this goal has alw...