In this episode of Getting Money Right, we’re continuing to answer some of the most common money questions from our listeners. Knowing the answers to some of these questions can help you tackle some of the challenging financial decisions you might face in the future with greater a chance of success.
1. What happens if I go over in my budget?
The money has to come from somewhere…savings, extra work, borrowing, but really, we need to deal with the root cause.
Usually, Housing, Transportation, and Food are budget categories that can easily go over.
Housing - Downsize the house or rent for a while. This one category when reduced will have the greatest positive impact on your budget.
Sell cars with payments and find a used car for cash until you can save for a better, newer car.
Lower insurance by having liability insurance or higher deductible - make sure you have enough saved to replace in case of an accident.
Shop with a list - groceries.
Pack a lunch and reduce eating out on weekends or 3 to 4 times a month.
Buy off-brand items to save on groceries.
Other categories that can be a problem, entertainment, clothing and miscellaneous.
Create a realistic budget that you can stick to.
2. What prevents a budget from working like it should?
Not having all the categories needed.
Not writing it down - lack of tracking income and expenses.
Finding a good method for tracking expenses.
3. Should I buy a car for my child who just got their driver’s license?
Buying a car for your child may entitle them to believe all of life’s big purchases should be handled by another person.
I’m ready to get married, my fiancé’s parents should pay for the wedding.
I want a house my parents should help me with my down payment.
I want to go to school I should borrow the government's money to do it.
I want to retire I should look to a welfare system to take care of me.
Obviously, this slippery slope is a little crazy, but just remember that you’re setting an expectation for your child with these large purchases.
I would never recommend going into debt to outright buy a car for your children, now you’re combining entitlement with examples of taking out large debts for instant gratification.
Now, let’s say you have the money and want to be generous, can you buy a vehicle for your child? Sure! I’d still recommend a used vehicle that has already depreciated the first couple years of value off, that way any dings and dents from young drivers won’t drive you crazy. Plus, insurance may be cheaper on an older vehicle with less value.
Help your child realize the time it took you to save for the vehicle and the sacrifices you made to give them the car, you want them to appreciate the value of the vehicle and not walk away entitled.
You also want to involve them in the car purchase. You want them to learn “walk-away” power when negotiating. You want them to see the cost and formality of filling out the paperwork. You want them to research the safety ratings and costs of different brands.
Another great method is the 50/50 match fund if you can afford it. You can offer to match any savings your child grows, up to a certain amount. You’ll need to put a limit on this since some kids can make incredible savings strides when they realize the benefit. Maybe $7,000 max match would be appropriate. As your child works and saves, they know that you’ll be doubling their savings to one day get a great vehicle. This way they have “buy-in”, but you’re still being generous.
The final method comes when you can’t afford a vehicle for your child. It’s time for them to get a job. They will need to save aggressively to be able to be able to purchase whatever vehicle their savings will afford.
You may be tempted to let your child take out a loan to buy a car, but this can backfire really quickly. Most teenagers don’t have the self-awareness to hold down a job through high school and college to make payments. They will need to budget for the monthly payment, the insurance, gas, repairs, and annual inspections etc. This can easily be:
$200 a month for the payment
$100 a month for insurance
$50 a month for gas
$50 a month for repairs, oil changes, tires, and annual inspections