I just wanted to get some advice on what would be the best place to put my money while I’m both paying down credit card debt and saving for a new car. I am currently driving a 1996 Toyota Camry with 173,0 miles in. The car still runs well, but with how old it is I’m worried I might be on the market for a new car fairly soon. I also have about $13 in credit card debt split between 2 cards, with about $9 on the higher interest rate card (22% APR) and $4 on the lower interest rate card (17% APR).
I make about $2,0/month (after tax and 401K Contributions). Currently I put $250 in my savings account every month (with the intention of eventually using it on a down payment for a car) and use $150 to pay down my credit cards (I typically pay $130 on the high interest rate card and $20 on the lower interest rate card, eventually hoping to pay $150 on the lower rate card once the higher card is completely paid off). I try not to use my credit cards throughout the month, but sometimes I end up having to use the higher interest rate one in emergencies (but I intend to stop doing that).
I currently have $15 in savings for my down payment. When I need to buy a car, I will be on the market for a used car that is $110 or less. My credit is average but I will have a co-signer as I’ve never had a car loan before.
I’m basically wondering if there is a better way to do this. I know that my credit card debt needs to be paid down, but I don’t want to risk not having any money in savings for a down payment and having my car die on me. I also don’t want to have a hard time getting an auto loan because of my credit card debt. Plus, I know I’m just throwing money away on interest each month I carry a balance.
I’m also really worried about taking on the burden of an auto loan as I basically live paycheck to paycheck after bills, savings, and credit card payments. Once I have a car that I’m not worried about, I will probably have to ease up on how much money I put into savings each month in order to afford to auto loan (if my credit cards are not completely paid off yet).
Any advice is appreciated. I’ve discussed this issue with friends and family before and have heard arguments for both sides. Just wondering what strangers think.
Thanks!
Update:
Thanks for all the answers. To answer some questions: I make $33,0/ year but after Tax and 401 K Contributions my take home is about $20/month (Plus 2 “Bonus Paychecks” of $10 per year). The reason I am budgeting for an $11,0 used car instead of a cheaper one more has to do with the safety and life expectancy of the vehicle than aesthetics. If I buy a $2,5 car, I’ll most likely need to start saving immediately for the car I’m going to buy when THAT one dies. A fairly late model used car will mostly likely have more life left in it, life that will extend beyond my auto loan (especially if I stick with Toyota…which I intend to).
I appreciate all the advice and I think I will begin paying more down on my credit card and easing up on the savings. I’ve heard of many Camry’s getting up to 2k miles so if I can keep saving for that long, maybe I will be able to pay cash for my $11,0 car in a couple years (knock on wood!).
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If you’re paying your bills on time and are not at the max for your cards, your credit should be really good. Throw in a co-signer, and you should be able to get a car loan for under 10% easily. The link below can give you a range for your area.
That said, your choice is between reducing risk (having a decent down payment for a car that you might need) and reducing a known problem. Let’s crunch some real numbers:
Eight months of continuing the current path:
Car savings: + $3,5
– 22% CC: Just paid off: 8 mo interest = $1ish(?); 130*8 = $1,040
– 17% CC: Still a balance: $240 + any interest – call it $10 to round things out.
NET: 3,250
Use current savings to pay off debt, then add $150/mo to savings. Eight months later:
Car savings: $2 + (8 * $4) = NET $3,4
So, in eight months, you’ll have more in savings. Until then, you won’t have as big a down payment for a car, but you’ll have better credit (lower balance), and you won’t be paying interest to someone else – you can keep it for yourself.
Also, you may have some options if your car dies – can you carpool or take public transit? If you can do that now, it will stretch out the life of the car.
Unless the car has immediate concerns, like a strange clunking noise, I’d pay off the credit cards.
Good luck on keeping up the savings – an emergency fund really makes me feel safer – I just wish I could get it from 2 months to 6, myself. You can get a feel for how much it will cost a month in the second link – 10K for 36 months @ 6% interest came out to $304/month, while 8K was $243. I hope your car lasts!
Source(s): http://www.bankrate.com/auto.aspx
https://www.ncsecu.org/Calcs/MonthlyPayment.html?T…
1 car, 2 adults, 1998 Honda Civic 155K miles, but $0 on the CCs – we’ve been thinking about this too.
MBA
By putting your money in ‘savings’, you are actually wasting money.
You should forget about a new car until you are debt free. Currently you’re driving a car that is half as old as mine. I drive a thirty year old car and providing I service it when it is supposed to be serviced, check the oil, check the tyres, and the radiator, mine runs just fine.
That $9 on the 22% interest card is costing you an extra $198 just in interest. Add to that the $4 at 17%, which is costing you $28 a year, and that’s $226 a year you’re throwing away. Pay down the debts before you start saving for a new car. Pay the minimum repayment on the lower rate card, and the minimum plus whatever extra you can afford on the higher rate card, until it is clear. Then move your extra money onto the lower rate card until that is paid off. When you’ve paid off both cards, get rid of the high rate card. Keep the low rate card, and use it each month to make a purchase, and then repay it immediately, with extra. For example, if you buy petrol for your car, and you spend $50 and pay with the card, pay back $52. Do that for twelve months and your credit rating will really improve.
If you want a new car, you’d better save up for it. A new car is the biggest waste of money you can get. NEVER get a loan to get a car. That will just cost you more in interest than the car will ever be worth. Just save up and buy a good later model secondhand car. Negotiate with cash. You do not need a new car. The car you have is perfectly fine. It is far better than my $20 Mitsubishi. I’ve had that car since 25, and it’s been pretty reliable. You could save yourself a lot of worry by learning a little about cars and checking it over regularly. Get it a simple service every twelve months. It’ll cost you FAR less than a late model car. A later model car is just a waste of money. If you borrow $80 at 9%, with a deposit of $30, for an $110 car, then that loan will end up costing you $9964. That’s nearly $20 more than you borrowed. If the rates are higher, you’ll pay even more. If you lose your job and can’t service the loan, you’re screwed. Don’t borrow for a car.
Get debt free, then start saving for your replacement car. Keep your current car in good condition so that when you go to sell it, you’ll get good money. A Toyota Camry is a Jap car. The Japanese make some of the best cars in the world. My partner’s got a Datsun that’s odometer has gone full circle. They are built to last. Treat them with respect and you’ll get years out of that Camry.
Do not get a car loan. That is just financial foolishness. Put up with your current car until you’ve saved the $110 cash you need to buy your replacement. By saving, and using the credit card wisely, you’ll have good credit in case you ever want to save up and get a house. But don’t blow your dough on a car loan. And get rid of those credit card debts.
Honestly, if you have to borrow money to buy the car, you can’t afford the car. It’s as simple as that.
Apply the $16 to the $18 CC bill. Then pay off your credit cards and stop using them. If you put it into savings, you’ll earn a measly 2% at best. Not paying off the CCs cost you about 18% in interest. Then hope your BF pays you back so you can pay off the remaining CC balances. Pay off the cards and use the payments from those cards to attack the other cards you have. Once paid off, start a savings plan for emergencies. Your BF’s car is not a emergency. Your husband’s car would be an emergency. How are you going to pay for your next semester’s tuition? Reimbursements come AFTER you pass your course, not before. Why did you adopt a dog? That dog is going to cost you in feed and vet bills. Fixing your BFs car and adopting the dog is now water over the dam. That money is gone.
If I were you I would take $4 and pay off the credit cards in the next 4 months. Use your $15 for your emergencies and stop using the credit cards. Then I would take the 4 and save it until you need a new car. If your car dies and you have $2,5 saved then PAY CASH for a $2,5 car. It sounds like you make about $27,0 per year. I would ask why you want to spend almost 50% of your income on an item that loses value? I know of a guy that is worth over $40million and he spent $30,0 on his car or 0.075 of his wealth. Remember what you are getting.
It sounds like, over all, you are doing well. I hope that this helps.
You have $4 a month to save or pay off debt so I would pay off the 22% interest one as soon as possible. That way the interest is gone and you’re left with only one with 17%. Now pay off that as quick as possible.
Without debt, you will now be able to add the $4 monthly into savings which will make interest. This will add up way faster than only putting a little into savings because you’re not losing 22% and 17% every month from debt.
Now you will be debt free and have savings and be able to buy a car.