The basic way to buy a car is to get a loan. You can either get a loan from the dealership. This is the most convenient way and they will be more than happy to lend you money to buy their car. If you plan a little ahead you can go to your local bank or credit union and get preapproved. Then when you are going into the dealership you will be able to compare the dealerships offer to the banks offer.
You can even disclose the bank offer to the dealership and see if they will beat it. When you borrow through the dealership or from the bank you will be paying off the loans principle and interest. Most people buy cars this way. When you borrow you are now reducing your monthly cash flow due to the car payments that you will be paying for the next 3-6 years. And if you are like most people you finally get the car paid off and then you decide to get another car, and start the process over again.
The next best way to buy a car is to save up the money. Whether you delay your next car purchase or get an inheritance check, you will need to wait to buy a car until you have the cash on hand to pay for it. This will be in addition to any other cash needs that you have. This cash should not be combined with your emergency fund. If you do then when you buy your car you will have no emergency fund and expose yourself to getting in trouble. You can keep the money in the same account, but do not use your emergency fund as your car fund. The benefit of paying for a car purchase with cash is that you will not be paying a bank interest on top of the car price. The drawback is that it is difficult to discipline yourself to save and not touch the money, but if you can you will be significantly better off and have more control over your finances then those who borrow for their car purchases.
Even better than simply saving money in a bank account would be to invest the amount you are not paying in interest. When you put this extra “interest saved” into an investment you will be able to either buy more expensive cars in the future or invest for retirement. This will allow you to use your discipline and reach your long term goals more easily or make them more attainable.
The last and best way to pay for your car purchases is to use your cash value life insurance. Think of it similar to saving the money and investing the difference. To make this a superior choice it is critical to use the right insurance company and the right policy for you. You will pay premiums into your policy and initially the cash value will be less than your premiums, so this is not the best way if you plan on using this money in the next couple years to buy a car. Once the policy has been in place for several years you money will continue to increase the internal rate of return for years to come. The true benefit comes since you are borrowing against your policy and not actually cashing it out. This allows you to pay yourself back. When you use a savings account your cash may only be earning 1% or less, while the investment from the “saved interest” may earn you more in the market. The benefit in using cash value life insurance is the cash value will all earn a return as each payment of principle is paid back to the policy. One thing to consider is; just like your cash account should not be combined with your emergency fund, you should not use all of your cash value in the life insurance policy to buy your car. The worst thing you can do is cancel this policy and either lose money or pay taxes on any gains. When you compare the use of cash value life insurance to saving and investing the “saved interest, it comes out ahead. This means when it is used properly you will be able to buy the exact same cars at the same time and have extra cash value then you would without it. Not to mention that you have a death benefit to your loved ones. You also can add a disability waiver that will let you not pay the policy premiums and the insurance company will pay them when you become disabled. This means that if you are fighting cancer or recovering from a heart attack, and you are disabled, then you will not have to pay the policy premium and the insurance company will pay it and you will still be able to borrow against your policy for your next car purchase without any concerns that your policy will be hurt. Remember to use it properly and run a few situations to see how you would come out using cash value life insurance to fund your car purchases.