Car Replacement Fund

Here’s how you can save enough money to pay cash for a new car.

Let’s say your initial plan was to buy a $20,000 new car with a 20% down payment ($4,000) and $380 in monthly payments for four years. Instead, follow these steps:

Step One:   Hold onto your old car and wait six months before buying another car. Put the $4,000 down payment into a savings account. Add $380 a month to this account. This is the money you would have been paying on a new car. At the end of six months you will have $6,280.

Step Two:  After six months buy a used car for $6,280.

Down payment

$4,000

Monthly payments
$380 x 6 =  

 $2,280

Total saved

$6,280

Step Three:  Continue to put aside $380 each month into the savings account (a short term bond fund earning 5% interest per year). This is the money you would still have been paying on a new car. At the end of 4 years you will have $20,145 in your account ($1,905 of this is earned interest). Here’s how much you will have at the end of each year: 

 

$380 month  x 12 months

 

Previous Year’sBalance

 

Interest

  Total at End  ofYear

Year 1

$4,560

+

$         0

+

$114

= $  4,674

Year 2

$4,560

+

$  4,674

+

$348

= $  9,582

Year 3

$4,560

+

$  9,582

+

$593

= $14,735

Year 4

$4,560

+

$14,735

+

$850

=$20,145

Step Four:  After saving for four years, pay cash for your new car with your savings of $20,145.

Step Five:  Continue depositing $380 a month into your car replacement savings account. You will be able to pay cash for a new $20,000 car in another four years.

Note: If you keep your car for seven years (instead of four), you will only have to save $200 a month to pay cash for a new $20,000 car.

Photo Credit: Elizabeth

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