The Road to Ownership
How to help your teen save money for a car — rather than making the purchase yourself.
Brought to you by Liberty Mutual's
The Responsibility Project
Whether you should or shouldn’t buy a car for your teen driver is a subject that’s endlessly debated. On the one hand, you may have the means and want to reward your teen for making the honor roll/football team/cheerleading squad. On the other, says teen expert Josh Shipp, the author of forthcoming The Teen’s Guide to World Domination (St. Martin’s Griffin, August 2010), encouraging teenagers to save to buy a car for themselves could be a better idea: “You should buy your kid a car if you want him to live with you until he’s 35. But helping him save is a great way to teach a lot of different lessons in responsibility and independence.”
Here are five tips that experts say can make the process easier on both of you – and maybe even a little fun.
1. Start building credit early.
There’s good and bad news in the new Credit Card Accountability and Responsibility Disclosure Act of 2009, which took effect in February: no one under the age of 21 can now get a credit card without a co-signer (i.e., most likely you, the parent). That means it’s no longer as easy to get into credit trouble early, but it’s also not as easy for your teen to establish a credit history. To help your teen get on the road to good credit, consider co-signing on a credit card that your teen will agree to pay off each month. He or she still won’t likely be able to build enough credit to finance a car alone, but in the months (or ideally years) preceding that big purchase, you’ll be able to teach valuable lessons about interest rates, minimum payments, and the importance of paying on time each month. For instance, you can show your child how long it will take to pay off a credit card balance if he or she only makes minimum payments using a calculator like this one at Bankrate.com.
2. Make a formalized savings plan. (Better yet, test drive it in advance.)
If you don’t think that you and your teen are quite ready to get a credit card together, you might want to start with a prepaid spending card, which looks like a credit card, but works more like a debit card. You — or your teen — can load the card with a certain dollar amount, and purchases are deducted from the balance. This won’t help your teen build a credit history, but it will help him or her get comfortable with making monthly payments and thinking about budgeting.
Once your teen gets used to the system, you can begin a savings plan specifically for the car, says Remit Sethi, author of I Will Teach You To Be Rich, who blogs and councils young adults on personal finance on his website Iwillteachyoutoberich.com. “Determine a payment schedule, and wait to see if those payments can be made for three to six months before you even talk about getting a car,” he recommends. Figure out how much your teen can reasonably contribute to savings (for a down payment or to buy the car in cash) and agree that he or she will pay you that amount to apply to the savings. Being strict about savings doesn’t mean you can’t reward your teen at some point; consider a matching program, Shipp says: “Tell kids you’ll match their contribution to the car dollar-to-dollar, or that you’ll give them fifty cents for every dollar they save.” Making a clear-cut plan puts the goal in closer range and makes saving seem less overwhelming.
One technique Sethi also uses is dividing a savings account into “sub” accounts. “That way, you know what you need to be parceling out and you’re not just dipping into one big pool of money.” Sethi’s own sub accounts include the down payment on a new house, a trip to China, and even a “stupid mistakes” slush fund that could take care of parking tickets or other unplanned events. The trick, Sethi says, is making sure your teen can track his or her own savings.
3. Make a budget plan for part-time jobs.
If you and your teen decide that he or she will take on a part-time job to save or cover costs, sit down and work out a budget. First you’ll need to decide what percentage of your child’s net pay should be used for the car, and if a percentage needs to be devoted to other important savings events, like college expenses. You’ll need to talk about taxes, and show your teen how take-home pay gets reduced after FICA and income taxes are dedcted. Then distribute pay among different savings buckets. Don’t forget to budget for fun, totally discretionary items — an important motivational tool.
4. Go shopping together.
Parents who make a car magically appear on the driveway under a giant bow miss an important opportunity. Even if your teen knows more about car mechanics than you do, a few shopping trips where he or she gets to talk to salespeople and discuss loans and finance arrangements is a great way to learn. Before you go, discuss what kinds of cars you’ll be looking for, and read reports together, such as the Consumer Reports reliability survey. The 2009 survey showed that inexpensive small cars and midsized family sedans are the most reliable, and generally advised against buying cars for inexperienced drivers that have a high rollover risk, such as large trucks or full-size SUVs.
5. Factor in phantom costs.
Most parents already have a decent sense of what the total cost of car ownership is, but kids may not always know. “My car payment is $350 a month,” Sethi says, “but phantom costs make it more like $1,000 a month to operate my car. Factor in, among other costs, twice-a-year-maintenance (amortized across a 12-month period), fuel, the cost of parking, and car insurance, and make sure your teen understands what the real cost of the car is before you go shopping.