In our 25 years of marriage we’ve bought cars in almost every way imaginable: new from a dealer, used from a dealer, and used from an individual. We even leased a car (bad idea) and bought the car outright when we were done.

It’s fair to say we’re pretty experienced in the ways to buy cars.

But this week we bought a used car for my teenage son and we did something new. We saved up and paid cash for it. It was by far the most satisfying way to buy a car and we plan to do more of it.

Why Pay Cash When Buying a Car?

Paying cash for a car has several benefits. The most obvious is that you save the interest you will pay on the financing of a car. That, in itself, makes the car cheaper.

But that’s about finance. Another benefit of paying cash is more of a psychological one: you tend to spend less than you would if you were financing.

When you hand over cash for a car, you feel every extra dollar. The amount you have budgeted for the car becomes very real and it’s hard to let that number creep up.

That’s not the case when you finance a car, because you’re looking mostly at the monthly payment amount. And what’s an extra $10 or $25 or even $100 a month when you’re talking about a car payment? Especially if you’ve fallen in love with the car.

A lower purchase price will probably save you money in other ways too. Your sales tax, property tax, and even insurance rates are all tied to the value of your car. Those will be lower if you spend less.

How to Pay Cash for a Car

So let’s assume you’re sold on the benefits of paying cash. How do you go about saving for such a large purchase?

If you currently have a car with a payment, the solution may be easier that you think. Simply continue to save the car payment amount after the loan is paid off and plan to do it for the amount of time you financed the car in the first place.

If you can manage to do that, you will have saved the purchase price of a new (or used) car. Keep funneling that money away and you’ve just eliminated the bank, credit union, or car finance company from all of your future car buying. You’re paying yourself instead of paying them.

If you don’t currently have a car payment, you’ll need to find the money to begin saving for your next car today. Don’t make it more complicated than it needs to be. Do some rough calculations about when you want to buy your next car and how much you want to spend. Simple division will give you the amount you need to start setting aside each month.

The money will essentially come from one of two places:

1. Money you carve out from your existing budget.
2. Or money you earn on the side through part-time work or a business enterprise.

The key is planning, because if you don’t plan for your next car, you will certainly be financing it. And how will you find the money then?

How about you? Do you finance or pay cash for your cars? If you pay cash, what’s your system for saving?

Julie Mayfield is a freelance writer and blogger who writes about everything having to do with personal finance. She shares money saving and debt reduction tips on her blog, The Family CEO. When she’s not reading or writing about money, you can usually find her hanging out with her friends and family and cheering on the Kansas Jayhawks.

Photo: cjc4454