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Richard A. Morris & Jayne A. Pearl
are coauthors of

Kids, Wealth, and Consequences
Ensuring a Responsible Financial Future for the Next Generation
Crash Course in Car Ownership
By Jayne A. Pearl

When many kids turn 16 they get their first car. In fact, CNW Marketing Research, which tracks national purchasing trends, says 41 percent of 16- to 19-year-olds in the United States own cars as of 2004, up from 23 percent in 1985. The percentage of parents who pay for those cars has also risen. In 1985, 19 percent of teenagers' used cars were paid for by their parents. In 2004 the figure is 40 percent. Most kids know less about this new financial responsibility than they know about what's under the hood. Before they take possession of the keys, make sure they understand the economics of car ownership:

  • Choose the car that's safe and fits your budget. Who will pay? How? Give or sell your used car to them? Lend them the money from the bank of mom and dad?

  • Establish rules of the road: about where they can drive, letting others in the car, keeping up grades... decide on consequences up front. No texting or cell phone use at all while driving.

  • Put them in the financial driver's seat. Even if you plan to foot the cost of the car, having kids save to handle car maintenance will help them be prepared for inevitable repairs and is likely to motivate them to take good care of the car to try to stay out of the auto mechanic's shop. They should sock away at least 10 percent of any earnings, allowance and gift money. In fact, it's a good idea for them to start saving when they're 14 or 15 -- before they get the car -- so they'll have a cushion to deal with future car expenses.,

  • Let the car serve as a living lesson. Use whatever natural occurrences with the car as opportunities for your teen to learn to weigh options and make decisions about the car. Do not rescue them if they get parking or speeding tickets.


When Ryan, my son, was 16, he asked me if a car was an asset or a liability. Strapped with insurance payments as well as gas and maintenance costs, My son was beginning to feel the sting of the financial burden of car ownership. What a terrific question! The answer, of course, is that it depends. At any given time it could be one or the other. So we sat down and listed all the ways his car was an asset and the aspects that were liabilities. The balance sheet below provides a financial snap shot after his first three months of car ownership. On the asset side, the value of his car started at $1,000, but depreciated by $100 after three months (on the liability side). His monthly income of $400 x 3 months left him with $1,200 during the three-month period, for total assets of $2,200.

His salary went to pay for $1,597.50 of liabilities: $50 per week in gas ($400 per quarter), $104.17 a month ($312.50 per quarter) for insurance, one $35 oil change, a (hopefully) one-time bill of $150 for a new exhaust pipe, a $75 speeding ticket, $75 for his registration and inspection, and $100 per month ($300 per quarter) for payments on a loan from Mom for the car. At the end of the quarter, his automotive assets exceeded his liabilities by $502.50 -- which comes to $167.50 per month (which is called shareholder equity).

However, his current assets minus his current liabilities, comes to a negative $397.50 (which is called working capital). In other words, his salary during this period was not enough to cover his car expenses. During the next quarter, he will possibly have $350 less in car costs (he will not have to pay for another inspection or registration, he may remember to keep to the speed limit to avoid another speeding ticket (which could raise his insurance cost!) and perhaps he will not incur another repair bill. But he will still be short $47.50 in working capital. So does owning a car make economic sense?

Ryan felt like it did -- his job was playing guitar at gigs on weekends, and he needed the car for that. But as soon as he started college in Boston he got rid of the car. By then, its value had depreciated to nearly zero. He sold it to a junkyard for $200. But he learned a few financial facts of life from the experience.

Balance Sheet: Was Ryan's Clunker an Asset or a Liability?



Jayne Pearl is a freelance journalist and entertaining speaker, focusing on family business and financial parenting. She is author of Kids and Money: Giving Them the Savvy to Succeed Financially (Bloomberg Press) and has co-authored or ghost-written ten other books. Jayne began her career at Forbes and was former senior editor of Family Business magazine, to which she has contributed for 20 years. She has written hundreds of articles about family business, financial parenting, personal finance and business management. She has also appeared on PBS, CNBC's Power Lunch, NPR and CNN, and been quoted in publications such as the Christian Science Monitor, Reuters, Forbes, Parenting, Real Simple, Working Mother and US News & World Report.

© Jayne A. Pearl. Printed with permission. All rights reserved. www.kidswealthandconsequences.com

Opinions expressed in articles provided by book authors do not necessarily reflect the opinions of Allowance Manager, its parent company, or its affiliates.
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