Marvelous Money: Our car fund

Friends, thank you so much for sharing your thoughts on my last post!! It meant so much to me, and I loved reading all of your comments. I will be back with more about how we shared the news with our families soon, but first I wanted to turn to a different subject: our car fund! I mentioned it briefly in last year’s big paying off debt post, but since it has been our biggest financial goal for 2015, I figured it was time to write about it!

In my debt post, I mentioned that we were planning to pay off our two car loans in mid-2014. We did (hooray!). For a little back story, we purchased both of our cars in 2011. Both of the loans were about the same – about $250 each per month at about 2.5% interest. Though I generally try to avoid debt whenever possible, I am grateful that loans exist and that we were able to get them to help us secure reliable cars.

After tackling our other financial goals throughout our first few years on our own (I talk about them more here, but they went in the general order of emergency fund –> wedding –> house down payment –> student loans), it was pretty quick work to finish off our car loans. And even though, as I said, I am so grateful that car loans exist and that we were able to get them the first time around, John and I are committed to never taking one out again. We believe this is possible, and I believe the same is totally within your reach, too!!

Establishing a car fund is what I would call a “second level” financial goal. Since it’s a saving goal rather than a paying off debt goal, it only makes sense to tackle it after you’ve paid off any credit card or educational debt, and obviously after you’ve paid off any car loans. The mechanism is simple: as soon as you’re done paying off your car, you begin putting the exact same amount of money as your payment (or more!) into your own account. Continue doing this until you’ve amassed the amount you plan to spend to replace your vehicle.

Here are a few other questions you might have if you’d like to do this yourself:

How much money should I save each month? As I noted above, the easiest way to transition into this is to simply transfer the same amount you were paying on your loan (if you had one) into your own account. However, depending on how soon you’d like to replace your car, how nice of a car you’re planning to get the next time around, and how risky you’d like to be with your investment (more on that below), you may want to beef up that amount. Right now, we are contributing $1,000/month to our car fund.

What sort of account should I use? A simple savings account, like you’d get at your local bank or credit union, is definitely an option. If you’re not looking to purchase for 3+ years, you might look into opening an investment account through a low-cost brokerage firm like Fidelity, Scottrade, or Charles Schwab. This exposes you to more risk but gives you the potential for a higher return via additional investment options. Whatever type you choose, I’d recommend stashing the money in an account that’s separate from everything else – general savings, emergency fund, etc. – so that the purpose is clear and you’re not tempted to touch it.

What should I invest the money in? I am NOT a financial advisor, so I’m definitely not going to advise you on this! It’s all about deciding how comfortable you are with risk and choosing accordingly. It’s also important to think about your time horizon – it might not make the most sense to invest money you’d like to use in five years entirely in stocks. Asset allocation mutual funds might be a good vehicle to look into because they have pre-assembled stock and bond mixes from which to choose.

The beauty of this system is that even though your budget looks the same despite paying off your loan – the same amount is still going out every month – you’re now paying yourself, and EARNING interest instead of PAYING interest! A much better arrangement! And how good will it feel to walk into a car dealership one day and pay cash for your chosen vehicle? I can’t WAIT!

Friends, I would love to hear: how long have you had your car, or how long do you plan to keep it? We’re planning for our two to last for at least ten years, but mine is on year nine and still going strong, so I have high hopes we’ll be able to keep it for longer!