A depreciating asset is one that grows to be worth less over time. Unlike a work of art or real estate that can grow in value, a car (other than certain antique or specialty cars) is almost certainly guaranteed to be worth less over time than on the day it was bought.
In most places in the country, a 16th birthday marks a rite of passage. This is the date on which a child can get a learner's permit and eventually a driver's license. This also is the time you'll have to address the question of the car.
Depending on where you live, a car may be a necessity. Your child might not be able to get to school, a job, or friends without one. So, you'd better help your child know what car ownership is about in terms of dollars and cents. You'll also have to decide how much of this financial burden you're willing and able to share.
Reality Lesson in Car Costs
Piggybank on It
Look for ways to cut insurance costs. State Farm offers discounts for good students (a report card must be provided to the company), while Allstate lowers its rates if a child's college is more than 100 miles away from home.
Miles per gallon (MPG), is a way of expressing how efficient a car is when it comes to using gas. Technically, this refers to how far the car can be driven for each gallon of gas in the tank (for example, 25 MPG means that you can go 25 miles for each gallon of gas). The higher the MPG, the better the gas efficiency and the cheaper it is to run the car.
Piggybank on It
Look for a car with a generous warranty that will cover the cost of certain repairs. Even if a car is used, the original warranty may still be in effect or a dealer may offer a special used car warranty.
Your child may not fully understand the exact dollars involved. By the time your child is 16, she may understand it costs money to buy a car, and she may also know that it costs money to own a car. But she probably realizes this only in abstract terms, not exact dollar amounts. She needs to know the hard facts so that she knows what she's getting into if she takes on the responsibility of a car.
Here's a list you might want to share with your child to open her eyes to the types of expenses involved in having a car.
- Purchase price. Whether you buy a new or used car, you're talking in the thousands today. A car can be one of the largest purchases your child will ever make (although he'll probably make it repeatedly throughout his life). No matter which type he opts for, a car is a depreciating asset. It's not an investment in the usual sense.
- Sales tax on the purchase price. If your child saves up for a used car costing $2,000, she had better understand that when she goes to get plates for the car in most states, she'll have to pay sales tax on the purchase price.
- Registration and license fees. As with a sales tax on the purchase price of a car, registration fees are a way that states extract money from car owners for the privilege of being an owner. Rates vary considerably from state to state.
- Insurance. A car owner must carry car insurance because he can't register a car without it. Insurance is costly, especially for drivers under the age of 25. This is because drivers in this age group are considered inexperienced. Rates for male drivers under the age of 25 also are higher than for females of the same age. This is because boys generally have a higher incident of accidents and cost insurance companies more money. Your child can reduce his insurance costs by taking a drivers' education class or a defensive driving course, by not speeding, by keeping a clean driving record, and by forgoing the sports car until he's older (even if he or you can afford it).
- Gas. Gas prices in recent months have been low. (Adjusted for inflation, 1998 gas prices were as low as they were in 1958.) But there's no guarantee that they'll stay low in the future, so your child should be prepared for fluctuations in gas prices. When shopping for a car, she also should consider the car's MPG. The more your child drives, the more it costs to gas up the car.
- Maintenance. With new cars, maintenance can be low. With a used car, however, the ongoing cost of keeping it in operation can run high. For example, the car may use a can of oil at nearly every fill-up. Even a new car requires routine maintenance periodically, such as oil changes and new tires.
Sharing the Cost of a Car
You may not be in a financial position to pay for all or some of your child's car. If he wants one, he'll have to work for it.
But you may be able to decide how much of the cost of a car you're going to share with your child.
A preowned car is just another name for a used car; it's a new word for an old car.
- The family car. If you allow your child to use the family car, you'll want to decide whether she's responsible for putting gas in it and contributing to its upkeep. At a minimum, you can require that she keep it clean.
- Family car hand-me-down. You may be able to give your child your old car and get yourself a new one. Once the car is his, however, the lines must be drawn on who pays for ongoing costs. I was able to give my kids a used car with the understanding that they pay for half the insurance and all the gas and maintenance. Other parents I know continue to pay for insurance and maintenance but shift responsibility for gas and oil.
- Kid car. Your child may be able to buy her own car with savings and earnings, and some parents may split the cost of a car in some way (for example, each pays half the purchase price). Some well-heeled parents buy their child her own car. After you and your child know what you both can afford, the next decision to be made is whether to buy a new car or a preowned one.
Buying a new car has its upside and its downside. The good part about a new car is that repairs should be cheap—things that generally shouldn't break, such as the transmission, are covered by warranty if they do. The bad news is the sticker price: You pay top dollar for new cars.