Q: My daughter is looking to buy a car when she leaves school in 2 years. She has a part-time job and receives money for jobs she does around the home. Where would you recommend she invest her savings? I am happy to help but I want to see her 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 she focuses on the goal she is seeking to achieve. The act of saving is not a great motivator, the motivator is the outcome that savings brings. So keep her focussed on the car rather than the dollars. Often a visual reference to the goal such as a picture on the wall will maintain motivation.
Break the goal down into weekly or monthly savings targets. For example, if she wants to save $5,200 over 2 years, she would need to bank $50 a week. Draw a grid over the picture of the car, each box represents a regular saved amount, each time she deposits that amount she can mark it off. Many a house deposit has been saved using this basic technique.
Help manage her savings expectations, if the goal is unrealistic she won’t stick to the plan. If it is too hard, either modify the goal (cheaper car) or extend the savings time frame maybe 3 years.
Given the relatively short investment time frame, a higher interest savings account that rewards regular saving is the most appropriate investment. Current Interest rates are hardly motivating but the rate really isn’t the key to achieving her goal, rather it is the discipline of regular saving.
In terms of helping her out, encourage positive behaviour. Rather than gift money unconditionally, offer to match or proportionately fund what she saves on a regular basis as a reward for staying “on track”. Alternatively, gift her money when she 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 her 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. She will need to budget for ongoing costs beyond the purchase of the car. Consider the insurance, maintenance and running costs of the car.
Finally, a wise piece of advice I once received, “spend as little on a car as your ego will allow you to!”