From the TGIF 2 Minutes Archives… with an update on buying cars for kids.
There are few things as exciting as getting a new car: the “new car smell”, the test drive, sound system, sunroof, heated seats… the feeling of “everything is new”. And these days cars are advanced computers on wheels and can be very cool.
With that said (back in mid-2021) yours truly bought a new car – the first new car in 15 years! The 2005 (Certified Pre-Owned) B-mer went 180k miles and could have gone another 100k but with too much maintenance. It was time for a new vehicle. But what new car to buy? New or used? Sedan or SUV? Buy or lease? And the cost: go expensive or go reasonable in cost?
Any major purchase – housing, appliances, transportation, kids’ education, family vacations, etc. – needs to be evaluated both from a financial and emotional perspective. The emotional side is fairly obvious, but the financial side has both obvious and not-so-obvious factors. Cash flow considerations are obvious and not-so-obvious too.
The obvious parts of the cash flow consideration:
- Do I have the money in my bank account to write the check?
- Am I making a down payment or buying the vehicle outright?
- Buying a car outright is a huge positive for monthly cash flow although having a large enough sum of cash on hand can be challenging – depending partly on stage in life and job level/security.
The not-so-obvious factors of the cash flow consideration:
- What is my credit score? (Even cash purchases require a credit inquiry.)
- If leasing or borrowing – Am I ready for the longer-term commitment to a car payment?
- If paying cash, what method of “paying cash” will be readily available? (This factor can be surprisingly complicated!)
- If I go with the expensive vehicle now, will I be sacrificing things that I want and need now or later?
- Conversely, if I go with the reasonably priced car now, will I leave open the possibility for the nicer car or nicer things I really want later?
In the case of buying a car for a child:
- Lease or Buy?
- New or Used (aka. certified pre-owned)?
Notably, when it comes to the lease vs. buy decision for a child or younger person (or the parent buying the car for the child) consider the anecdotal information learned recently* about younger people, especially those under the age of 30. They are super-mobile and love to travel! These adventurous people also tend not to swing for expensive plane tickets and airport delays and think nothing of jumping in a car for a 10- or 12-hour trip (think: thousands of miles). The typical mileage per year driven by younger people can be in the 22,000 to 23,000 range, whereas the annual allowances for miles per year on a leased car is only between 10,000 to 15,000 miles. Think: your child using your car as an Uber! An Uber that YOU are paying for! Expensive!
On the other hand, for a person a bit older and entrenched in more senior work roles (again, typically) miles driven annually can be much lower, in the 5,000-to-8,000-mile range, well within the allowance of a typical car lease. These considerations can be financially meaningful in the buy vs. lease decision for a car for a child or younger person.
Buying a car – or house, second home or paying kids’ college tuition – all involve large dollar purchase decisions with a short timeframe and emotional and practical factors. There are short- and longer-term financial implications. The idea is to minimize immediate financial stress and maximize longer-term happiness and enjoyment. In this era of buying houses sight unseen or buying cars online without the test drive, these spending decisions need to be made with an awareness of both the obvious and not-so-obvious factors.
*Thanks to my brilliant colleague and CFP® expert and Founder of Main Street Financial Solutions, Brett Danko.