Get Rich Slowly has a blog post entitled why I drive a 13-year-old car, which I recommend reading.
I followed a similar strategy until recently. I bought a 1989 Pontiac 6000 LE station wagon a few years ago, paid cash, somewhere between $600-800 for it, and vowed to drive it until it would not go anymore. It was hideously ugly, did not have heat or air conditioning, the electric windows sometimes stuck, and the electric locks would sometimes fail to unlock, but it was super cheap, and insurance was even cheaper. I was able to set aside $250/month as a “car payment” to myself.
When I got rid of that car, it wasn’t even because it needed repairs, it was just as junky as ever, no better, no worse. The problem was that I needed to be able to drive to Orlando frequently, and although the car was great for my in town driving, I didn’t feel entirely safe taking it on the highway that frequently, not to mention the relatively lousy gas mileage of an older heavy car. By then I had saved up enough to buy a “newish” car, but my need wasn’t urgent so I waited until I spotted a great deal. I found a solar yellow 2005 Scion xB that the owner had been having difficulty selling due to the nature of how ugly solar yellow is, but that type of ugly was still a few steps up from my old car, and I was able to talk them down to $2,000 below blue book.
I’m happy with my decision, it’s an extremely utilitarian car which gets very good gas mileage, and it’s a tolerable sort of ugly. I still put aside “car payments” even though I don’t have any, so I’ll be set if anything happens. I think the main thing to take away from the article is that you can save a lot of money by simply owning your car, so that’s my goal: to never have a car loan again. If you start out with a car you can pay cash for and make the same payments as you would otherwise, at the end you have the cash to pay for a new car (plus interest). If you do it the traditional way and buy a car with a loan, at the end you have an old car that may not be worth much anymore. If the circumstances allow it, I highly recommend buying no more car than you can afford with cash.
Then, when you have cash and wheels, you’ll have the ability to save even more money because you have more negotiating power with cash, and the ability walk away from any deal that’s not an awesome one.