I read a formula in a personal finance book once, can’t remember the source now. It went something like this:

Step 1: Figure out how much cash you have to spend on a car.
Step 2: Find a car for that amount of money. Stick to your budget even if it is only $500.
Step 3: Every month, put the amount your car payment would be into a savings fund for your new car.
Step 4: When your car dies in a few months (or hopefully years) from now, repeat at step 1, using your savings fund.

Alternative to Step 1, not available in all areas: buy a bus/train pass, skip the car. You can buy one later using the savings fund if you decide you really need to.

1. Spend Less Than You Earn – I know what you’re saying and it’s a good start but really, you should just spend as little as possible while still maintaining what you personally consider a reasonable lifestyle (meaning as in point #4 – “enjoy life”). Spending less than you earn should be a starting point, but it’s really not enough. I know a couple (no kids) who make about $200k and barely spend less than what they earn, but they’re still terrified at the prospect of retirement.

4. Retirement Savings Order – 401k With Match, Roth, 401K, Everything Else – don’t forget to see if your company offers a Roth 401k.

5. Avoid Debt Unless It’s For A House, Car, or Education – I know everyone’s harping on the car debt question, but I even wonder about the education debt question. Can you (or your kids) take some core classes at community college? In our area, my sons could theoretically have their freshman year covered by the time they graduate from high school and if they take college classes while still in high school, the school district will cover part of the tuition! Personally, I don’t think it matters as much where you start as where you finish, and I don’t think it’s necessary for kids to move out and “experience life” in order to get a good education. And use those 529’s if you can … if you overfund for one child (or that child decides not to go to college), you can give the money to another child.

6. Showing Off Breeds Either Jealousy or Annoyance – besides those feelings, it would be wise to remember that they probably can’t really afford their toys. Enjoy financial freedom and the decreased stress that comes with it instead of worrying about what your neighbors think. They care about you about as little as you ultimately care about them.

8. If It’s Too Good To Be True, It Is – and remember, potential reward goes hand in hand with potential risk. Don’t go sue your planner if the dollar signs in your own eyes blinded you to investment risk.

Instead of buying brand new, you could have bought a 3-4 year old “German Luxury Station Wagon” for 40% less than you paid. You’d still get the same vehicle, and it probably would still give you the same service life. It’d just cost you 40% less.

Act Morally, Ethically, and Truthfully. When a law does not conflict with your morals, your ethics, or the truth then you should also act legally.

Bottom feeding purchases (simply basing a decision on cash outlay) is a dangerous route. We all know people who based a decision on price alone only to end up with short-term junk.

I went into debt ten years ago to buy a German luxury station wagon. It’s been paid off for over five years and still looks and runs like new. And I know that I am driving my family around in a steel cage of safety. The point is that spending a bit extra, or stretching for the best long term value usually saves money over the long run. Friends have gone through 4 or 5 crappy but brand new Chrysler mini-vans in the same span of time I’ve been driving my one car. Sure, they paid less at purchase time, but they’ve made 5 purchases that when totaled, equal $40k less than I spent ten years ago. And no… the car’s not been in the garage for anything but annual oil changes (as recommended by the manufacturer) and new tires.

Cars are some of the fastest-depreciating items that you can buy – some of them are only worth 50% of the purchase price within three years.

If you avoid keeping up with the Jones’ (see No. 6), then you shouldn’t need to drive a brand new car every few years. Buy a used, reliable car that’s 3-5 years old and pay cash for it instead of financing. You’ll get many years of use out of it, for a fraction of the cost.

The usual advice in this area is to take the money that you would put toward a car payment, and keep making it after you buy the car. Put the money into savings, and by the time your car needs to be replaced, there will be enough money in there to buy a new (used) car.