How to Save Big When You Buy a Car

Dec. 7, 2009 — -- The end of the year is a great time to buy a car, because dealers are desperate to clear their lots to make room for new models while salespeople are eager to meet quotas and score bonuses.

So, as we continue our discussion about how to save big -- more than a thousand dollars in less than a year -- I want to devote this week's column to buying a car. In my upcoming book, "SAVE BIG: Cut Your Top 5 Costs and Save Thousands," I contend that the best way to save big is to figure out where we spend big. Cars are our second-biggest expense after homes, so they're a nice fat target for savings.

Here's how to Save Big on a car:

1. Always buy used. Never new. Cars depreciate an average of 45 percent in the first three years. Let somebody else be the chump and waste all that money. Buy a three-year-old, low mileage used vehicle.

2. Pay cash if you can. It's crazy to finance a depreciating asset, like a car. At the same time you're paying extra for it, it's going down in value.

3. Limit your loan length to two years. If you absolutely cannot afford to pay cash, then take out a short loan. The average car loan length in the United States is five years. You don't want to pay interest all those years!

4. Make your car last. Most people switch cars every five years. You will save big by stretching that time period out by even just a couple of years so that you end up owning fewer cars in your lifetime.

That's my four-part plan for how to save big on a car. I know it probably sounds intimidating to pay cash, and if you can't do it this year -- after all, times are tight -- here are two plans for how to achieve this worthy goal when you buy your next car. The key is to start planning for it now.

The Plan:

Plan 1: The $50 car accountFigure out how much you can afford for a monthly car payment right now. Then subtract $50 from it. In other words, if you can afford $400 a month, resolve to spend only $350. Then use that $50 a month to immediately start a fund to pay cash for your next car.

Plan 2: The continuing car paymentAnother method: Save nothing now, but after you've finished paying off your car loan, continue putting a payment of that same size into a savings account each month. You're used to it, so it's easier. If you make your car last and keep it long past when it's paid off, you should have enough money saved to pay cash for the next one.

Reader Contribution

Starting this week, I hope to include ideas you, the readers, have contributed for how to save big. I'm trying to get a dialogue going so we can all help each other in this crazy economy. Here is one that's directly related to this week's topic, how to save big on cars. If you can't afford to pay cash for a car this time around, then you'll need the most affordable car loan you can get.

Here's a Big Secret discovered by Perry of Two Rivers, Wis. He writes:"Check with your insurance company for loans. I found the best car loan terms were from my insurer. No one else was even close. They even include a clause where the insurance company automatically pays any difference between the loan value and the car value if the vehicle is totaled before it is paid off. Other loans I looked at did not offer that -- or required an additional payment for that feature."