Day 29: Pay for Stuff Using Cash
With a quick swipe of the debit or credit card has brought the mindset that we use plastic to purchase just about everything. We’d like to encourage you to try something unfamiliar – pay for everything with cash.
Have you ever felt that sick feeling in your stomach as you swipe your debit card wondering if you have enough money in your account? You can avoid the stress involved with shopping if you decide to pay cash – and stick to your cash only plan.
There is a lot of 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. For a long time, GMAC has made more more profit on a car sale than GM made on the profit margin of the actual car. Without GMAC, GM probably would have gone bankrupt years before it did.
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 today & tomorrow tying up some loose ends.
Decide to improve your finances today by deciding to spend cash. Spending cash will help you control your budget and get your finances in order each month.
Ready? Let’s continue on to the next day.