How To Keep Upgrading Your Car Loan Free

Today we are talking about cars once more. In previous posts, I have discouraged taking a loan to buy a car because as we all know that a car is not an asset. It loses value as soon as you drive it and keeps losing value after that. However, a car is often a necessity and circumstances can force us to borrow to buy a car.  It is also necessary to keep changing and upgrading your car for various reasons: the most sensible reason for upgrading your car is to manage your car maintenance costs because old cars are expensive to maintain. The more common reason to upgrade a car is to buy one that is reflective of your growing social status. There are other people who buy and sell cars as a hobby and do so every year or two, unfortunately this is rarely financially prudent.  Whatever your reason, this method gives you a pain free and loan free way to keep upgrading your car every 6 years or even sooner if you are diligent. This method however does not work for the hobby car traders.

Car 1: Bought on debt

Let us assume your first car is worth about  750,000 shillings like mine was 5 years ago.  In Kenya, asset financing is a popular way to buy vehicles, where the bank finances  70% of the car value and you raise 30% from your savings.  This means that the bank gives you a loan of Kshs 525,000 at 17% annual interest  for 3 years, which costs you 18,718 shillings per month in loan repayments.  Once you are done repaying this loan, you should keep saving the Kshs 18,718 in an investment that earns you at least 12% in interest per year, for at least another 3 years.

Car 2: Bought six years after Car 1

After three years of consistent saving,  you will have saved a total of 673,848 shillings, and the savings will have earned you an additional 80,862 shillings, to give you a reserve fund of 754,710 shillings to buy your second car. Sell your old car to top up the savings amount.  Like most Kenyans, I bought a 7 year old car imported from Japan, which I have driven for 5 years and it is in a pretty decent shape. It could run for another year and I would probably be able to sell it for at least 350,000 shillings in next year.  This means I would be able to afford a car worth at least 1.1 million shillings in cash as my second car if I had followed this method. Looking at current car prices, 1.1 million shillings buys me a newer and much better car.

Car 3: Six years after Car 2

Once you have your second car, keep  saving 18,718 shillings in your car upgrade account, until you have sufficient cash for your next car. Since you do not have a loan on this car, your savings start to build up from year one instead of year three as you did in the first instance. By the sixth year, you will have 1.7 million shillings in savings and a car that you can sell for at least 500,000 shillings, giving you a car upgrade  fund of 2.2 million shillings. You can buy  nice 5 year old SUV for this amount. 🙂

Car 4: You are now going for a really nice one for your 40th birthday!

Keep the third car for 8 years while saving up for the fourth car. Remember you are saving the same amount as your loan repayments for the first car 18,718 shillings per month even if your income may have grown considerably over the years. In 8 years, you will have 2.6 million shillings in the account and a car that is worth at least 1 million shillings resale or slightly less.  Experience has shown that cars get cheaper over time so by this time, 3.6 million shillings will possibly be able to buy you showroom car in cash which you can keep for even 12 years or more before the next upgrade.

And the cycle continues. By the 5th car, you probably will spend part of your car upgrade fund on something else because you will have saved 5 million shillings in the 12 years you will have been driving your fifth car.

A friend shared this cool method with me from a personal finance forum he attended.   My car is a bit old now but  I found this so awesome, I am setting up a fund for the next car, even if it is just for 2 years.  What do you think? Is 19 years too long to wait for a brand new car if it means buying it cash? Will you use this method for your next car? Let us discuss in the comments section.