If it is your idea, as a parent, to help your teenagers set realistic financial goals and be financially successful in life, one of the worst decisions you can make is to buy them a new automobile.
When my daughter was ready to drive, I bought my mother’s 2008 Hyundai Tucson. Funny thing is that it gets my daughter to school and her jobs just as well as any other vehicle. We focus more on teaching her how good the inside of her bank account looks than how the outside of her car looks. She is already well on her way to financial independence–and not making this mistake will help your children get there quicker as well.
Specifically, here’s why a new car is such a colossal mistake:
The laws of depreciation vs. appreciation. The fact is that cars are guaranteed to depreciate. And the financial lesson you want to teach your children is to buy assets that can appreciate over time, not those that will undoubtedly go down in value. If you explained that a $40,000 car will only be worth $25,000 in two years, do you think your child would rather drive a $20,000 car and invest the other $20,000?
Teens don’t see the cost of ongoing maintenance. It’s likely that if you paid for the new car, you are also picking up the tab for the insurance and maintenance (maybe even the gas). If that’s the case, when your child has to ultimately take over these expenses they won’t have any idea of how to budget for them. And what will happen if gas goes back up to $4 a gallon? But if they had to pay for those costs with, say, the $2,500 they earned from a summer job, they may have rethought the shiny new car with the bigger price tag–and higher accompanying expenses.
You give them unrealistic growth expectations. If your child is driving a brand new Mercedes, BMW or Range Rover, what will be the growth trajectory for getting a “better” car? It is important to instill in them that some of these things can be attained by hard work when they are earned, but being gifted expensive possessions such as a fancy car is not something that is likely to happen in the future.
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.