An automobile is a major purchase, and it's the consumer purchase most likely to put a major kink into your financial situation.
Here are the three rules to follow when buying a car:
RULE 1. Pay cash. Hang on. I know you may not be able to do that right now. Just be patient, and I will teach you how. This principle is so important that I repeat: Pay cash for your car.
RULE 2. Opt for a late model. Make sure you are not the first owner. Let someone else take that 20 percent depreciation hit. Your goal is to drive the best late-model previously owned car you can afford with the cash you have.
RULE 3. Always make payments. I hope that got your attention! On the one hand, I just told you to always to pay cash for your cars. And now I am telling you to always make payments. Both principles are true. You must adopt the attitude that as long as you intend to own a car, you must anticipate the cost by making monthly payments to yourself in anticipation of your next car. This way you are always earning interest, not paying it.
Even if your current car is doing well, I want to challenge you to start today so you can pay cash for your next car.
Open a special savings account somewhere convenient, and begin to make that monthly payment into the account. Pay yourself $300 every month, just the way you would have to pay that to a finance company if your current car died a tragic death in the next week or so. That's right. Make these payments to yourself. Be strict with yourself -- rigid and unbending! No late payments. No slacking. Continue driving the car you have for as long as you can, even if it is a real clunker. At the end of a year, you will have accumulated $3,600 cash plus interest in your account with the Bank of You. Not bad!
Then, 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 together with the $3,600 and buy the best car you can find for $5,600 cash. By now you've become used to making $300 payments to yourself, so don't stop. It's a habit, and a good one at that.
At the end of another year, sell your current clunker for, say, $4,800 and put that money together with the $3,600 you saved during the year by making those payments to yourself. Now you can buy the best used car you can find for $8,400. Then, continue making those payments.
At the end of year three, sell your current car for, say, $7,800. Put that together with the $3,600 from your savings, and buy the best car you can find for $11,400. 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 your most recent car for, say, $11,000. Add that to the $3,600 from your savings, and buy a used car for $14,600. By year five, you will have at least $17,000 cash to upgrade to an even better car. By year six, you should have at least $20,000 cash to buy a car.
Keep repeating this process once each year. As you become more adept, you will lose your fear of buying and selling cars. And imagine your confidence and personal power knowing you are not at the mercy of a salesman, bank or finance company as you look for a car. You can negotiate because you will have plenty of experience.
After five or six years, buying a brand-new car will certainly be an option. But I predict you will pass. Why? Because by this time, you will be so good at buying late-model, low-mileage cars for a fraction of the price that you will scoff at the folly of buying new and feeling that big depreciation hit on the front end.
Still, you will have that option. And who knows? You just might take it.
Mary Hunt's column, "Everyday Cheapskate," can be found at creators.com.