Let's say that tomorrow morning, you wake up to discover that overnight — gulp! — your car was destroyed beyond repair. You're not covered, and you're devastated.
You must have a vehicle, but because you don't have any money saved, you have no choice but to buy a brand-new car with nothing down. Realistically, what car payment can you afford if you pull the plug on cable TV, stop eating out and basically cut down on all frivolous spending? $200? $300 $600?
OK, back to reality. Your car isn't destroyed, and you'll keep driving it for a while. But remember the amount you said you believed you could afford to pay for a monthly car payment if you really put your mind to it? Let's say it's $300. Keep reading.
Open a special savings account somewhere convenient and begin immediately making those $300 monthly payments into that account. To yourself. Every month. Be strict with yourself — rigid and unbending! No late payments, no slacking.
In the meantime, as you are making these big new payments to yourself, continue driving the car you have now for one more year — even if it is a real clunker. You can endure anything as long as you have a plan and you know it will end.
If you open that account through an online savings bank such as Ally, you will begin earning interest (currently 2.20 percent APY) on the growing balance instead of paying interest on a conventional auto loan.
At the end of one year — 12 payments to yourself — you will have accumulated $3,600 cash, plus interest. Not bad!
Now, sell your clunker. I don't know what you have or what it might be worth, so let's say you can sell it for $2,000. Put that money with the $3,600 and buy a better clunker you can find for $5,600 in all cash. By now, you've become used to making $300 payments to yourself, so don't stop. It's becoming a habit and a very good one at that.
At the end of another year, sell the current clunker for say $4,800 and put that money together with the $3,600 you saved during the year by making payments to yourself. Now buy the best used car you can find for your $8,400. And continue making those $300 monthly savings deposits to the Bank of You.
At the end of year three, sell the current car for around $7,800, and together with the new $3,600 from your savings, buy the best $11,400 car you can find. Note: Your selection of good used cars is getting better each year. You have graduated from clunkers to much more respectable automobiles.
In year four, sell the most recent car for close to $11,000, add the $3,600 accumulation, and buy a $14,600 used car.
By year five, you have at least $17,000 in cash to upgrade to an even better car. By year six, you should have at least $20,000 in cash to buy a car.
Keep repeating this once each year ... upgrading, paying cash for a better car, and still a better car. As you become more adept, you will lose your fear of buying and selling cars.
Keep this routine of saving first and then upgrading once a year. Within five or six years, you will have accumulated enough cash to buy a brand-new car — all in cash. You will have more than $20,000, including all of the interest you have earned each year on your $300 monthly deposits.
Imagine your confidence and personal power, knowing you are not at the mercy of any salesman, bank or finance company as you look for a car. You can negotiate hard because you have cash!
Buying a brand-new car will certainly be an option. But I predict you will pass. By this time, you will be so good at buying late-model, domestic, low-mileage cars for a fraction of the price of a new one that you will scoff at the folly of buying new and feeling that big 20 percent depreciation hit on the front end.
Still, you will have the option to do exactly as I promised: Buy a brand-new car — the car of your dreams — for all cash. And who knows? You just might.
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate webpage at www.creators.com.