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Last November, I realized it was time to finally buy a new car. My workhorse of a station wagon had seen me through 10 years and 300,000 kilometres. I had faithfully cared for it with regular oil changes and taken it to my mechanic at the sound of the slightest rattle. But after years of just routine maintenance needs, my trusty sidekick suddenly required several critical and expensive new parts. I would need to spend about five times the car's value to keep it going, and risked the prospect of more expenses and reduced reliability as it deteriorated further. My mechanic gently suggested it was time to start shopping and I reluctantly agreed.

Given the positive experience with my beloved wagon, I decided to buy a newer version, with the hope of making it last another 10 years. I found a good deal on a gently used demo model at the dealership and, after accounting for the trade-in value of my car, paid cash. I applied some of my savings to the purchase and financed the rest through my line of credit.

By paying cash and financing it myself instead of through the dealer, who offered an interest rate several hundred basis points above my line of credit rate, I was able to get more than $10,000 knocked off the sticker price. Since I've been focused on paying down my line of credit quickly – I've reduced the balance by half already – those savings won't get absorbed by interest costs. It also means I'll soon be able to enjoy owning a car with no monthly payments.

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At a time when leases have become one of the most popular ways for Canadians to obtain transportation, and low-interest 60-month car financing offers abound, it may seem that monthly car payments are simply a fact of life. But it doesn't have to be so, according to personal finance columnist Liz Pulliam Weston. "When you overspend on cars, you don't have enough money left over for more important goals, such as saving for retirement, paying down debt or building up an emergency fund," she commented in a recent article.

She offers a simple formula to figure out how much you can afford to borrow for a car, assuming you haven't accumulated the savings to purchase one outright. Make a down payment of at least 20 per cent, finance the balance for four years or less and make sure the resulting payment is no more than 10 per cent of your gross income. Ms. Pulliam Weston suggests that even spending 10 per cent of gross income on a car is too much for many people, if they're carrying other significant forms of debt, such as a large mortgage.

However, even if you can make the numbers work, Ms. Pulliam Weston believes that if you want to drive a new vehicle off the lot, you should save up for it. "A new car is not a birthright; it's a luxury. And luxuries should be paid for in cash."

To build up your car savings fund, drive your current car until it's paid off, she says. Then redirect those payments to a dedicated savings account for your next car. This is a process that will take several years, requiring patience and determination.

"If you don't accumulate enough to buy a new car when your current car dies, get a used one," says Ms. Pulliam Weston. Buying a used car will also mean you can avoid the severe depreciation that occurs when you buy new – a new car's value drops by at least 10 per not long after you leave the dealership.

Taking Ms. Pulliam Weston's advice to heart means I should probably start saving for my next car as soon I make that final transfer from my chequing account to my line of credit. Then, 10 years from now, I will be able buy another wagon without any form of financing at all. But I may take a break to enjoy the freedom of no car payments for just a little while.

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