Car Replacement Fund Underway

Over the weekend I took some time to complete a few finance tasks that have been stacking up on my to-do list for weeks. One of those tasks was to officially establish a car replacement fund.

Now that we have paid off our car, we recognize that it won’t last forever, so we might as well continue making “payments” to ourselves so we can pay cash for the next one. Since we have been in car debt our entire marriage up to this point, we are used to living without that $300-$400 we were sending to banks and finance companies over the last decade. Continuing to make a “car payment” to savings shouldn’t be that painful.

The Car Replacement Fund

As usual, I turned to ING Direct (read my ING Direct review) to handle my car replacement fund. I could get a slightly better rate with other banks, but the convenience of creating additional “sub-accounts” at ING, and seeing all my targeted savings accounts in one view, is key to my motivation.

We labeled the new account “Car Replacement” and scheduled a monthly transfer from checking for the exact amount of our most recent car payment (roughly $300). In just one year we should have around $3,600, plus a little interest. In two years we should be up around $7,500 – well within the range of replacing our car.

When the time comes we will sell the car via private sale, and put the proceeds with the cash in the car replacement fund. Based on an a depreciation estimate for our current vehicle, and the projected savings balance in two years, that should give us a solid $15,000 to look for a newer, used vehicle.

Over time we will continue this trend of upgrading every few years, but always doing it with cash. The schedule isn’t that much different than someone financing a new car, paying it off over 60 months and then financing a new one. Well, except we won’t be financing it from a bank – we’ll be using our savings.

I’m lucky; I’m not a “car guy.” I don’t drool over showroom models, and with only one exception, I’ve never really cared what I drove (there was that whole Isuzu Rodeo leasing saga). To me a car represents four tires and sheet metal with an engine to get you from point A to point B. It says nothing about who I am, my status, or my personality. Fortunately, my wife feels the same way.

Thanks to this utilitarian approach to car ownership, we simply look for the best value, not the sexiest design. Give me a beat up exterior with a solid engine and low miles any day. And driving that car without dragging a payment makes it just that much sweeter.


  1. Unfortunately I like cabin technology in my cars so the price generally goes up, but we have started something similar as well recently with eyes on purchasing a *gasp* new car (or new used) early next year.

    We probably won’t be able to buy the next one with cash but that’s ok if I get a good rate (<4%). Just saving now to maximize the down payment. Really, what we want to do is make sure we never need to have two car payments at one time so we’re trying to get on the correct cycle.

  2. @Scott: My grandparents did this for much of their marriage (once they went to a two-car family). They alternated car purchases every few years as they paid off the other one. Eventually, my grandfather bought and kept a van for 19 years. Now I drive it.

  3. We have decided, after a bad decision a few years ago, to buy only slightly used models. And since I don’t have the car itch, where I want every bell or whistle, we can get them cheaper. So far, we’ve still had to make payments, but this January, we pay off our recent car and start making payments to savings.

    Thanks for the idea. I really appreciate it!

  4. I have family that followed that philosophy and I like it. I like predictability in my income and my expenditures and this helps to maintain that.

    I could keep my current car for a couple more years, but then I run the risk of having to buy two new ones at the same time.

    There may be better capital management models but this one reduces our risk of high monthly costs for an extended period of time.

  5. I have the hots for a new 2009 mustang v6 model. Through today I can get it from my bank’s auto buying service for over 33% off msrp (including the 3000 bucks cashback from Ford), that is a savings of over T00 bucks when one includes the tax credit for sales taxes on the 2009 federal taxes. I just got the iwants but realize I can still drive my honda with 231 thousand miles on it since I just put new tires, brakes and oil pan gasket in it. I am saving at smartypig but decided to try Lending Club to get a larger return (non FDIC). With the rule of 72 I should double my savings in about 7 years so will save for at least the 3 year notes payoff.

  6. …a savings of over $5400 bucks when one includes the tax credit for sales taxes on the 2009 federal taxes.

  7. That’s a strategy, especially in combination with the “newer, used vehicle”.

    Cars are one of those expenses (like houses) where the expense is mostly built in as of the day of purchase. Once you sign the paperwork and drive off, there’s no longer much you can do about how much it costs to keep it from that time on.

  8. I paid off my car loan in May 2008 after over 12 years of making car payments (not on the same car). After paying off that vehicle, it was so nice having an extra $500 to add to savings each month.

    I’ve started on my new car fund but I plan to drive my current paid off car until the wheels fall off.

    My next car will be paid for in cash!! Cars seem to run so much better when there is no lien on it.

  9. I just use the “savings goal” feature on Quicken to set up funds – they can be hidden on your checkbook account so you don’t see them unless you choose to. We just bought our 2nd Prius for a trade-in and cash saved just this way.

    I also set up funds for all my periodic bills – Add up your yearly expense for, say, insurance, divide by 12, and make an deposit to the fund each month. When you have to pay, you have the cash set aside.

    We set aside funds each month for insurance, prescriptions (because we buy every 3 months), car fund, savings, dental care, medical copays, tax preparation, taxes, auto license and service, our water bill, again because it’s 3 months, and a bulk purchases fund for when we go to Costco every 2 months or so. Using Quicken, I don’t have to set up actual bank accounts. It is one of the best features of programs like this in my opinion.

    We never, ever, pay interest on anything – it’s like having 10-20% more money! we only wish we had gotten into this mindset years sooner. When you have no payments, economic downturns don’t bother you so much.

  10. Sounds like a wonderful plan to me. I bought my Honda Civic new in 1999 and paid it off in 3 years. I haven’t had a car payment since then. Not having a payment has enabled me to pay for a sitter for my children a few hours per week to enable me to work on my consulting business during business hours (I also work evenings and weekends when spouse is home).

    I now face a dilemma though. My car has 95,000 miles. My mechanic says it’ll last another 100,000 miles. Not having a payment for another 10 years sounds great but I am a little worried about the safety of driving it versus the newer models. As they say, driving is the most dangerous activity most of us undertake on a daily basis. So I may buy a new car in a year for the safety benefits and plan to own it 10 years just like this one.

  11. Dave Ramsey has been advocating this for quite a while (“Never have a car payment” plan). We’re doing this right now–only keeping it separate from the 3-6 month emergency fund is a little tricky. I’ll have to look into the sub accounts you spoke of on ING, where most of our savings is housed.