You ought to get a really big trophy or maybe even a parade when you pay off an auto loan because you have accomplished a financial feat most American families can barely imagine. Congratulations!
Especially because seductive new cars boast improved fuel economy and tons of high-tech gadgets, most motorists trade in their cars before their loans mature. Therefore, the ordinary every day motorist forfeits at least 60 percent of his car’s purchase price in depreciation, he increases his insurance costs by at least 20 percent, and he throws his income-to-debt ratios out of balance. Keep your financial winning streak alive by adjusting your automotive costs and using your savings to retire other pressing debts or build up your savings and investment accounts. Most of all, make a pact with yourself: Promise that the next time you buy a car, you will pay cash. Now what?
First, Manage the Paperwork
Make sure your lender’s representative has signed and dated the official release of lien on your title. Then, because forgers easily and very convincingly can modify your title, store the precious document in a very safe place–not in the car. For extra satisfaction and security, you may take your old title to your county tax office or DMV, pay the fees and get a brand new title that proves you own your car free and clear. As you tie up the loose ends, make sure you change the “loss payee” on your car insurance; now, it’s you, not your lien holder.
A Five-Step Post-Payoff Plan
Now that you have paid off your second largest obligation, you will have quite a bit more money in the family’s monthly budget. Although you deserve a handsome reward, try not to yield to temptation because you have a rare opportunity to lay the foundations for the family’s wealth. In general, assign the highest priority to savings; then, develop an aggressive plan for paying off your house. The average family’s monthly car payment is about $400 per month, approximately 10 percent of the breadwinner’s take-home pay. You will maximize your savings when you follow this five-step plan.
1. Adjust Your Car Insurance
Your lender stipulated what kind of coverage you needed and set limits on your deductibles. Now, you enjoy the privilege of realistically determining your insurance needs and adjusting your deductibles to reduce your premiums. You seriously should consider canceling your comprehensive coverage, but repair costs make collision coverage a bargain. Think about raising your deductibles to $1,000. Because you have paid off your auto loan, your credit score should improve; the better credit digits should further reduce your insurance premiums.
2. Build up Your “Emergency Fund”
Because the average everyday family catastrophe costs about $1,000, you need at least that much in an easily accessible old-fashioned savings account as emergency fund. Take time, however, to estimate what you really would pay for a serious car repair, an uncovered medical or dental expense, or serious damage to your house and yard. Increase your savings goal accordingly.
3. Protect the Family Against Financial Hardship
In order to assure your family’s quality of life, save six months’ salary in certificates of deposit. Just as importantly, invest in permanent life insurance for both yourself and your spouse. The realities of 21st century economic life demand you insure both spouses for the same amount, and most experts suggest $750,000 as just enough to guarantee the family’s safety and stability. As a rule of thumb, insure each partner’s life for the outstanding balance on your mortgage plus 50 percent.
4. Contribute to Tax-deferred Retirement and Education Accounts
The cold facts of financial life will kill your urge to gloat too long over paying off your car loan. Unless you begin saving right now, your kindergartner will not have enough money for four years of college, and you will not have enough savings to guarantee a comfortable retirement. You can, however, reduce your tax liabilities and earn decent returns on your investments when you save money in federally approved education and retirement plans.
5. Retire Your Student Loans and Consumer Debt
Although you probably pay little or no interest on your student loans, they still appear on your credit history and hurt your scores. You probably can pay them off with just a few months of your car payment savings. Then, starting with the highest interest account and going in descending order, pay off your bank cards and revolving charge accounts. In order to protect your credit score, keep just one account open and pay off your balance every month.
More than 80 percent of Americans do not know how to set up a family budget or reconcile their checking accounts. Tie financial instruction to driving privileges: if your children are old enough to drive the car you now own, they are old enough to learn how pay for cars of their own. Refuse to hand over the keys until the children have learned the basics of family finance.
About the Author:
Gary Allen is a freelance writer for www.carinsurance.org.uk, a company that can help you adjust your insurance rate after you pay off your car loan.