31 Days To Fix Your Finances, Day 29: Paying Cash

The Simple Dollar offers a month-long plan for fixing your finances. All you need is an open mind and an hour each day.

There is one final point that merits discussion before we close out this month, and that is the logic behind paying cash for any purchases smaller than a home purchase. This includes automobiles, appliances, furniture, electronics, and so forth. To most Americans, this concept is almost alien, but if you take nothing else away from this month, this is the concept to remember.

Why pay cash? To put it simply, instead of paying some company an interest rate, you can invest that money yourself and earn some interest. This might seem like a minor issue, but in actuality it is thousands of dollars that you’re throwing away, more than enough to keep companies like GMAC in solid financial shape year after year after year.

How much can I actually save? In this example of a late model used car costing $10,000, you can pocket about $3,000 simply by paying in cash rather than financing the car. That’s how much you will pay in interest, plus the amount that you can earn in interest in a savings account. Do that three times and you’ve literally netted a free car.

How am I supposed to pay cash for a car? The next question that many people ask is how they can possibly pay cash for a car. If you’ve followed this plan from the beginning, the answer should be pretty clear: your emergency fund. If you see that an auto purchase is coming, start rolling money into your emergency fund instead of into other investments or uses, building it up to the point of having several months of salary in it. I recommend making car payments into the emergency fund at this point, preferably for a couple of years. Then simply walk into the dealership, negotiate a price without saying that you’ll use their financing, then write a check. After that, you’ll probably need to build up your emergency fund again, but you won’t be making payments on your car.

I can’t do that right now! That’s true, you probably can’t do that immediately. But you can set it as a goal. One big step towards achieving that goal is to stop leasing, because auto leases as they allow you to effectively rent a more expensive car than you can afford, but leave you with nothing in the end. If you already don’t lease, then buy a late model used and drive it for years past the end of the financing. While that’s happening, continue to make your car payments into your emergency fund. Then, when the time comes, you can simply buy a car, no questions asked.

So what can I take away? Spend some time and plan out when your next auto purchase will be and what type of car you’re aiming to buy. Then, calculate the numbers and see if you can put yourself in place to pay in cash. Can’t swing it? Could you swing it if you drove that car for another year? Remember, this does fit into your budget if you just transform your car payment into payments into your emergency fund, and in a few years the dividends of seeing interest build up on your car “payments” will really start to show.

Now that the month is almost complete, we’ll spend the next two days tying up some loose ends.

Ready? Let’s continue on to the next day.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.