The Car Payment That Can Be a Smart Move

car sinking fund

My car is not as flashy as this garage

Okay, up front I have to say that I do not like car payments.

The idea of taking out a loan for a vehicle someone really loves, versus just driving something that’s safe and good enough, is something that doesn’t resonate with me.  I know that many probably don’t agree with me on that, and that’s totally fine.

I’ve written a number of posts on cars, how much to spend, and how long to drive them.  One example of such a post is this one, where I describe driving decidedly non-glamorous car until it piled on a ton of miles.  Another example is a conversation I with someone who was actually cutting my hair at the time, telling me all about her amazing new SUV for which she took out a long-term loan.

So it might surprise you to see a post title on Squirrelers that has “car payment” and “smart” in it together!

Let me explain my thought process on this one:

The typical scenario that I suspect ends up playing out for a lot of people is that they try to buy the most desirable (as defined by them) car they can, as long as they’re able to somehow swing the monthly loan payments.  They really want a nice ride, see others they know driving nice cars, and they want that lifestyle too.  The car is not just a mode of transportation, but also a status symbol based on brand or something they just love because it’s cool.

I think it’s better to just buy a good enough car that doesn’t necessarily have to be new.  Used can be more than fine.

When buying such a car, we can still make payments.  However, the payments would work this way:

  1. Figure out the price of your favorite “good enough” safe and practical car that doesn’t cost much, and is preferably used.  Do this 3 years in advance of your purchase.
  2. Divide the price by 36.
  3. Each month, for 3 years, set aside 1/36 of the total price into a car sinking fun.  Make this a unique account, separated from your general checking account.
  4. When it’s time to buy the car, withdraw money from this fund and pay in cash
  5. Enjoy your car without the burden of taking out a loan.  Having taken out a loan for a car and paying cash for another, I would choose the latter!

Now, once you have the car, the saving doesn’t have to stop.  You can still set aside money for your next car, even a modest amount will help.  Hopefully, this car you just bought will last many years so your car sinking fund won’t need to be raided for quite a while.  When the time comes, you’ll be more than ready for your next stress-free car-buying experience.

So in effect, you’re still making a car payment.  But it’s a car payment that’s smart, since you’re only paying for what you need and you’re not actually taking out a loan.  It’s essentially the same thing as having targeted savings.

What it comes down to is that with realistic standards, and some basic planning, we can avoid taking on unnecessary debt like a car loan.  That money could be better used for retirement and financial freedom, which sounds a lot better that continuing the cycle of overspending and working forever.  At least to me it does.

My Questions for You

Do you think a car loan should be considered a totally normal expense in day-to-day life, or something that should be strongly avoided?

Do you see a car as something that’s a fun part of life that reflects your personality, or more along the lines of something that’s a functional necessity to get you where you need to go?

Can you see yourself paying cash for your next vehicle?


  1. Kathy says

    I hate car payments. We always had car payments until our current vehicle which we bought from a family member for cash (a sad story in itself). But even tough I hate car payments, I also hate taking money out of an investment account where we are earning interest or dividends. I’d think about just making the car payment out of current income while keeping the investment account intact earning interest that contributes to the car payment. Got that? All things considered, however, I tend to think that paying cash is best if you can afford it and then making the car payment back into the investment in order to do it all again sometime in the future.

  2. says

    After paying a car loan for the last two years, I can say that I will never, ever do it again unless the loan would be paid off in under 2 years. It’s one of our biggest expenses and as our car slowly shows age, the more bitter I get about it.

    My family, on the other hand, are loan flippers where they just bounce from one new car to the next. They are constantly owing their loan company at least 10k+. They do pay the difference though. But, I cant imagine this.

    • Squirrelers says

      Totally know what you mean, it’s hard to imagine what you describe in terms of constantly owing for cars. Perhaps people just get in the habit and then get comfortable with it.

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