In a perfect world, we’d pay cash for our car purchases. Not having a car payment is one of the best things ever. But what should you do if the car payment is going to drain your savings? I recently received the following question from an emailer, and I answered it on The Pete the Planner Radio Show.
I have a quick question for you I think you might be able to provide some insight on. I recently graduated from college and I’ve started my first real job. I’ve been fortunate in being able to work from home for the first couple months but soon I will need to move to the home office which is in another state. I have been borrowing a family car when I needed it living at home. I’ve tried to be pretty frugal through college and I have about $10,000 saved up through my time at this job and from working through college. I will need to buy a car within the next few weeks and I am strongly opposed to financing one. Do you think it would be a better idea to buy an older car for $3-4000 and maintain my cash which I’ve been working on building as an emergency fund? Or should I buy a newer car for $8-9000 that might last me longer but if I ran into trouble I wouldn’t have much to fall back on? My medium term transportation plan is to spend the next 4 or 5 years paying myself a car payment so that I can buy the next car albeit a nicer one in cash as well so whatever I purchase needs to be reliable for at least that long. Extra information: I have no student loans and I make a livable but not excessive recent graduate salary. I will pay around 350$ a month for rent with a room mate. Also probably add 100$ a month for food. Other than that expenses shouldn’t increase too much. After taxes withheld, insurance, 401k contributions, savings, rent, food and gas I expect to have around 500$ leftover from each month’s check.
Good question, Larry. Here’s my answer.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.