Q My son Jake is looking to buy his first car in 2 years’ time. He is in year 10 and has a part time job and receives pocket money for jobs he does around the home. Where would you recommend he invest his savings? Any tips on how I can encourage him to stay motivated to keep saving towards his goal? I am happy to help him out but I want to see him work for it!
A Saving to buy your first car is often the first step towards building the discipline and habit of life long saving. The critical thing is to ensure that he focuses on the goal he is seeking to achieve. The act of saving is not a great motivator, the motivator is the outcome that savings brings. So in Jake’s case keep him focussed on the car rather than the dollars. Often a visual reference to the goal such as a picture on the wall will keep him motivated.
Break the goal down into weekly or monthly savings targets. For example if he wants to save $5,200 over 2 years, he would need to bank $50 a week. He needs to hold himself accountable to his savings targets. Draw a grid over the picture of the car, each box represents a regular saved amount, each time he deposits that amount he can mark it off. Many a house deposit has been saved using this basic simple technique!
Assist him to manage his savings expectations, if his savings goal is unrealistic he won’t stick to the plan. If it is too hard, either modify the goal (cheaper car) or extend the savings time frame maybe 2.5 years.
Given the time frame, a high interest savings account that rewards regular saving is the most appropriate investment. Interest rates can be as high as 4% if regular deposits are made. However the rate really isn’t the key to Jake achieving his goal, rather it is the discipline of regular saving.
In terms of helping him out, encourage positive behaviour. Rather than gift him money unconditionally, offer to match or proportionately fund what he saves on a regular as a reward for staying “on track”. Alternatively gift the money when he reaches a pre-determined target. It is remarkable how the “must have” purchases suddenly become less important in the pursuit of the longer term goal.
Encourage him to think about saving for other goals beyond the first car; maybe a major holiday or even a house deposit.
A car is not an investment it is a depreciating asset, therefore do not borrow money to fund the purchase.
Jake should also budget for ongoing costs beyond the purchase of the car. Consider the insurance, maintenance and running costs of the car. Will he be able to afford the petrol?
A wise piece of advice I once received, “spend as little on a car as your ego will allow you to!”