For most people, a huge part of buying a vehicle is securing a good auto loan. But what if you were able to avoid that altogether? Or at least save enough so that the loan amount is tiny?
That’s a great idea. But since money is finite, it depends on what you have to sacrifice to build up your “next vehicle” money pile.
Should You Save for Your Next Car Before You Need It?
Should you save money for your next vehicle once you pay off your current vehicle?
That’s what a listener recently asked Clark Howard.
Asked Todd in a Clark Stinks podcast segment: "Kim in Georgia asked Clark if she should keep $20,000 in savings or pay off her $15,000 car loan and then use the monthly car payment to put toward retirement. Clark liked the idea of putting it toward retirement, but I think he may have missed something that I always think about.
"What about Kim's next car? My dad always told me that if your car is paid off, you should make a monthly car payment to yourself to save for your next car. If Kim's car is paid off, it's going to wear out someday. Should she be putting money aside or just waiting to take out a new loan later?"
The root of this question is about financial priorities. Clark hates taking on any sort of debt. And he has the financial means to make that possible.
So of course, in a vacuum, there’s no downside to saving money to buy a vehicle without a loan.
The first thing you need to do is live on less money than you make. Then you have choices about what to do with the excess money. And some of those choices are more advantageous than others.
“I always face a challenge as I talk about when you live on less than what you make, what are the priorities for that money?” Clark says.
“I love your idea of putting money aside so that when you buy a car in the future, you heavily defray how much would have to be borrowed. Or you get to the point where you can pay cash for a vehicle.
It’s all a hierarchy of priorities. Because most people can’t afford to do all the things.”
What Is Clark’s Hierarchy of Financial Priorities?
So that begs the question. What is Clark’s list of priorities? And where does saving for your next vehicle fit into that list?
In the past, Clark has emphasized contributing to your workplace 401(k) first. At least enough to get any company match that may be available. And even more beyond that if it's a low-cost plan.
Beyond that, the man from Roth heads straight for a Roth IRA.
"I put such a big emphasis on the Roth IRA and the Health Savings Account (HSA)," Clark says. "In the case of a Roth IRA, the money you put in grows tax-free and then later in life is spent tax-free.
“The HSA, you get an up-front tax deduction. You get tax-free growth of the money. And as long as it’s spent on an eligible medical expense sometime in your life, you get to spend it tax-free. So it’s like, even better than a Roth.”
After those two options, putting money into a rainy-day fund comes next, Clark says. However, if you have zero dollars in an emergency fund, at least partially funding that may move higher on the list.
After all of that comes saving money for a future need such as a vehicle.
Final Thoughts
Saving money for a future vehicle is a great idea. Clark thinks you should prioritize saving for retirement and making sure you can handle emergency expenses first. But if you’re already handling that, of course it’s great to save for future needs and avoid debt.
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