The following is a guest post by Adrian Johansen, a writer specializing in business and technology topics. Follow her on Twitter @AdrianJohanse18. If you’d like to submit a guest post to Money Q&A, be sure to check out the site’s Guest Posting Guidelines.
As your kids grow up, you should take any chance you can to teach them about money and finances because those lessons will be essential as they grow into adulthood. While you’ll have many opportunities to do so, one of the best times to teach them about financial responsibility is when they show interest in buying their first car.
This is a great time to educate the kids on the various expected and unexpected costs of vehicle ownership, and it also allows you to teach them about budgeting and making the best decisions for their future. Let’s talk about this amazing learning opportunity and how you can make the most out of it.
When your teen first comes up to you and says that they want to drive, you have an opening to tell them about all of the initial costs that go into financing a new car. It is a chance to inform them that the price that they see in the commercial or advertisement is not the whole story. They will need to understand that not only are there extra taxes and fees added on but that they can modify the total overall cost and monthly payments by thinking strategically about the down payment.
Let them know that while it is important to budget so that they can afford the monthly payments once they sign the dotted line, they really should initially save up for the down payment, which will typically be about 10%-20% of the purchase price. When they pay more upfront, their monthly payments will drop. As teens, they may not have a lot in their bank accounts yet, so they may opt to go closer to 10% or less if necessary. Your lessons about down payments will continue to be of importance if your teen ever decides to purchase a house.
This is also a good time to discuss the idea of accruing debt and the necessity to pay it off accordingly, so they do not face negative repercussions down the road, like a hit to their credit. Also, mention the importance of making their payments on time and the idea of overpaying if possible, so they can tackle some of the interest that comes along with the loan. On top of that, let them know that they do have other options, like buying a second-hand vehicle. Doing so may not include all of the glitz and glamor of a new car, but if money is tight, then the initial costs could be much less.
It is common for us to get so excited about purchasing a shiny new car that we forget about the monthly payments that will be upcoming. However, you must teach your kids the importance of planning ahead so they know what they can afford. If you haven’t yet, then this is a good time to show them how to make a budget. While they probably aren’t making a lot of money, have them notate all incoming funds from their part-time job and allowance and then account for every recurring expense they have (dinners out, time at the arcade, etc.).
You will also want to take this time to teach them about road safety and what can happen after an accident. Whether or not it was your child’s fault, it is a good idea to talk them through the claim process and how much additional money it can cost when you are involved in an accident (their fault or not).
Should they get involved in an accident, then it is advised to seek help from a legal expert, such as Dennis Hernandez, who can assist in seeking medical and financial support. This will, of course, incur a fee. But, it can help you both save money and lower costs in the long run.
With all of that information in hand, they can now see how much they have left over to afford the car payment. However, inform them that there are many other costs that they will also need to calculate, including the price of gas and insurance. Let them know that there is no way around it. If they drive, then they need insurance, and they must calculate the cost into their monthly expenses.
Car insurance for teen drivers can be more expensive due to their age and inexperience behind the wheel, so as a parent, you can opt to put them under your insurance. However, the kids should not be let off of the hook, and they should be responsible for paying their share every month. If money is tight, then this is a good time to teach them about cutting unnecessary expenses in order to afford the things they need. So if that means not purchasing the newest video game so they can afford their insurance payment, then that is a lesson they’ll have to learn.
This is also a great time to educate your kids about being responsible and how failing to be accountable for their actions could result in unexpected costs that they probably want to avoid. For instance, you should reinforce the importance of safe driving and avoiding distractions while out on the road. Remind them that not only can texting while driving lead to potentially fatal accidents, but if they are caught, then it could result in tickets and expensive fines that they may not have accounted for in their budget.
Your teen must also be educated about the importance of car maintenance so they can do their best to prevent unnecessary repairs down the road. It must be said that some costs are unavoidable, such as getting regular oil changes and rotating tires. However, by taking care of these issues now, they can avoid much more expensive costs down the road, up to and including the potential to need to replace their car entirely due to extensive damage.
Finally, you can teach your kids about the importance of learning the skills necessary to fix car issues on their own, so they don’t have to pay others to do the same work. There are many vehicle maintenance projects that teens can do on their own, including replacing the battery, the spark plugs, windshield wipers, and changing their oil. On top of the chance to save money, your teen could also get excited about doing these types of projects, and this interest could lead to a potential career down the road.
As you can see, there is a lot to learn when it comes time for your teen to purchase their first car. Teach the lessons above, and you will raise a smart and responsible driver.