Buying a car is likely to be your kid's first big purchase. Whilst it can be an exciting time, we need to make sure they understand the full financial implications of buying a car. Especially as many adults today are struggling financially and part of that is due to the amount they spent on their car.
Car as a status symbol
Car manufacturers spend billions collectively to get us to buy their cars and attribute feelings towards their brands. This means our kids are likely to be sucked into the notion that a car is a ‘status symbol’.
The theory goes something like this …
Those with nice cars have lots of money …
… therefore must have a good job.
… To have a good job they must be important and successful.
… Who wouldn’t want to be seen as successful?
We need to make sure our kids realise that a lot of people are spending so much of their money trying to ‘look financially healthy and successful; that it is actually making them poorer and reducing their chances of actually becoming financially healthy.
Don’t get me wrong, there are some people who are doing very well for themselves and have nice cars. There are also a lot of successful people who choose not to have nice cars (the classic ‘Millionaire Next Door’).
Our job as parents is to make sure our kids don’t fall into the trap of trying to ‘look successful’. This blog helps you set out why a car is actually making most people poorer.
How buying a car can make people worst off
Let’s first look at the big picture at why some people struggle financially:
They spend too much money
They buy things they can’t afford (use credit)
They buy things that go down in value
This is important as people who are using loans to buy cars are doing all 3 of the above!
Remember, if we think of money like seeds, we want our kids to be planting (saving and investing) so they can grow their own financial future. The actions above mean that they are giving away their seeds, not planting them.
The 3 factors which mean cars keep people poor
For our kids to appreciate how a car keeps a lot of people from being financially healthy and wealthy, we need to look at the costs. We can split these into three factors:
Interest on loan
Maintaining the car
The best way to help your kids learn about depreciation is to buy an ice cream. Ask them how much they’d pay for it when you first buy it and then ask how much they’d pay 5 minutes later once it’s started to melt. No doubt they will offer to pay much less after 5 minutes.
Cars can depreciate in value so quickly, often losing over half of their value in 5 years.
When people lease their car, they are paying a premium to the car company to cover this depreciation cost. I mention this as many people believe that leasing a car is a smart way to avoid depreciation, it's not!
TWO: Interest on loan
A lot of people buy cars using loan arrangements. This automatically increases the cost of the car and puts a monthly drag on your ability to save for the long-term. We want our kids to be saving for the long-term and growing their financial forests.
This drag on ability to save really upsets me from a financial point of view. Essentially, if you use a car loan to buy a car, you are paying more over time (interest cost) for something that is rapidly falling in value (deprecation) over time.
THREE: Maintaining the car
We all underestimate the ongoing cost of running a car (insurance, tax, fuel, washing, services, MOT (UK), replacing tyres etc.). Again, these can be a real financial drag each month. In most cases, the cost of these items increases based on how expensive the car is.
If you want to teach your kids about this part in more detail then I strongly recommend you check out the fun story ‘The Dragon That Pooped Too Much!’ (it’s definitely one of the stories I’ve written which I’m most proud of).
Buying a car in a financially healthy manner
Remember, this isn’t to say that your kids should never aspire to have a nice car. It’s all about being patient (the third rule of wealth). I drove my mum’s old, blue Fiat Punto until I was 28 until I got the car I always wanted. I bought it used, paid in cash and still had some money invested for the long-term. I loved that car - although I didn’t like the high maintenance costs much.
So help your kids buy a car in a financially healthy manner by following some simple rules:
Buy a car which is 5+ years old (avoid thousands on depreciation)
Buy using cash
Invest the savings
If your kids do need to borrow to get a car, make sure they have been saving the debt repayment amount for a period of time. If they can’t afford to save that amount, they can’t afford to take out the loan and need to find a cheaper car.
What does this mean in terms of numbers?
Let's pretend there is a new car that costs £20,000.
If your kids had a £5,000 deposit, then they could get this car by paying £345 per month for 4 years with a 5% per year car loan.
Alternatively, they could buy a 5+ year old car for £8,000. They'd still need to borrow £3,000 but this would only cost £69 per month for 4 years.
This means over that 4 year period they’d be paying £276 per month less in interest. Or £13,248 in total.
Now let’s suppose your kids invested those savings for 35 years (assuming they grow at 7% per year on average), that’s over £140,000 in savings as a result of driving a slightly older car for 4 years.
That’s just for one car purchase. If cars are changed cars every 5 years, then the savings get bigger and bigger.
Whilst a car might appear to be the symbol of freedom, the financial burden of a car is likely to take away your kid's freedom.
As parents, we need to inform our kids of the full cost of owning a car. Hopefully they’ll see that driving a slightly older car, that they can afford, is much more likely to help them become financially healthy, which is much better than just appearing 'financially healthy'.
If you have younger kids, make sure you read them the story ‘The Dragon That Pooped Too Much!’ so they start picking up on these important financial health messages in a fun and memorable way.
Thanks for reading!
P.s. Have your kids got their copy of Grandpa's Fortune Fables? It's the most fun way for them to learn how to be financially healthy and wealthy. Available at Amazon.co.uk and Amazon.com. If you are buying copies for your local school, there is a 20% discount. Order here.