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Be Your Own Banker To Save More Money
Credit is a useful tool. Having a good credit rating and using credit wisely can help you accumulate things that you could otherwise not save for in a reasonable amount of time. Take your home mortgage for example.
Instead of saving $1000 a month for ten years, which is hard to do for most couples when first starting out, you can save up a down payment and get a $100,000 mortgage on a home. You get to have a new home much faster and save on rent. The home mortgage is one of the few examples of credit that actually works in our favor. Almost everything else, perhaps with the exception of financing an college education, can be obtained by buying used and cheap after saving up for it.
Here is how the equation would work: Assuming you paid off your car, which was three years old and which was worth approximately $20,000 at present. You paid $28,000 for it . Your payment was $450 a month.
In three years you could save $ 400 a month times 36 months. You might earn three hundred dollars interest at today's rates. The transaction would look like this in three years after you start saving and are ready to buy a new car.
Savings Account: $14,700
Trade In Value: $14,000
= $28,700 This should be enough to buy a new car.
(Savings over financing a new car from the bank? Depends on the interest rate but as much as $5000 over three years. That's money in your pocket.
The hidden variable is inflation. What will a new car cost in three years? You need to monitor how much the rate of inflation is and adjust your savings accordingly. In theory your salary should go up, though not as fast, along with inflation so you can increase the amount. In a sense you are paying yourself to lease your car. With proper maintenance you might get six to eight years out of a new car. You still should keep saving the same amount since your trade in value plunges after four years and 100,000 miles.
The problem with credit comes when we start using it for smaller items. If you are charging food and entertainment on credit, and paying for it over several months, you have a big problem and you will always be in debt. Even using credit for new cars should be avoided if possible. There is a way to be your own banker.
Try to pay off your car early and then take an amount close to what you were paying, say 80% of your previous payment and put that in a savings account earning interest. When your car is ready to be replaced you should have enough in your savings account plus the trade in value of your car to buy a new car outright.
In a sense you have become your own banker. Instead of taking out loans for things like cars and vacations start an online savings account with Capital One, etc. and save in advance for whatever you are going to buy. You'll earn interest instead of paying interest. With many online savings accounts you can open as many sub accounts as you wish. While this might seem unnecessary you feel different about "raiding" an account named "New Car" or "Hawaii Vacation".
This strategy has worked well for Michelle and I.
We have multiple accounts that we use to save for about five different things,
from new cars to trips and even new computers. Being your own banker is easy and
if you follow this strategy you will save tens of thousands of dollars over the
course of your life.
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