I found inspiration to write this post after seeing a student driver bumper sticker on a Tesla Model 3. As I pulled up beside the Tesla, I thought surely there’s not a 16-year-old driving. I was wrong. Where do you go from here? If she learns to drive on a Tesla, is she going to be comfortable with driving a used Toyota? It is much harder to step down in vehicle after driving a nice one. The mid-level Tesla model 3 has an msrp of 51k. It’s a luxury vehicle at this price point. What if she expects to continue driving such a nice vehicle after getting her driver’s license? Mom and Dad would have to open up their pocketbooks. And if the parents spring for it, the daughter won’t have any financial stake in the car. No sacrifice or financial weighing, so she doesn’t flex her financial decision-making muscles to grow from the transaction – a wasted opportunity. At this age we form our framework of how we interact with money and make financial decisions. Your money framework sets you up for financial success or creates a life-long headwind – no pressure parents.
Scenarios: Tesla vs. Camry
Life has seasons and like nature the order is important. When we jump out of order (i.e. buying a luxury car for a 16-year-old) you set their baseline at a high level. That teenager is never going to drive an inexpensive car. This decision is significant over their lifetime. Unless someone plans to provide them vehicles for the rest of their life. In the scenarios below I compare two approaches to purchasing vehicles over 50 years:
- New Tesla every 5 years
- New Camry every 10 years
Assumptions:
- Tesla purchased every 5 years. Any residual trade-in value is offset by inflation and trading up in car. Essentially, they renew a 50k loan every five years on a new vehicle.
- Camry owner invests the payment difference monthly over 50 years earning 8% annualized. Drives the Camry for 10 years total each time: 5 years with loan, 5 years paid off. Camry price is 25k.
- Both assume a 0% interest rate on the new car loans
If they will be given vehicles for their lifetime, then ignore the below calculation – it doesn’t apply.
Financed Tesla – Auto Loan Payment Calculator | Cars.com
And the Camry scenario:
Payment difference invested for 50 years (invested amount changes every 5-year period as the Camry driver has a loan for 5 years and then doesn’t for 5 years):
With the Tesla you have shared a mindset that may cost your kid $4 million over their lifetime. Once you start along this track of new luxury vehicles every 5 years, it’s going to be difficult to jump off. I’m not saying people shouldn’t buy luxury vehicles, what I’m saying is there should be a progression to that point. If you set the baseline for the 16-year-old at Tesla, they will have a hard time stepping down in vehicle. And they won’t appreciate it as much as someone who upgrades to a luxury vehicle at age 40.
Baseline Setting
The same philosophy applies to housing. Once you start out with an expensive home, to downgrade to starter home will likely never happen. You are accustomed to the nicer lifestyle. The same goes for food expenses. If you become accustomed to fancy meals out. You have set your baseline for dining tastes at a high level.
It is more natural to increase your lifestyle as your career and income grow. Not start out at high level from the beginning. Unfortunately, our culture is generally not a very patient one. It has become more difficult for people to wait until their income has increased to buy the luxury car or home. Additionally, due to the nature of social media we see the high points for others. Would you be more likely to see someone sharing about their new Tesla or Camry? Or the night out to Ruth’s Chris Steakhouse or the night out to Chipotle for a steak burrito?
I think setting too high a baseline is the reason 2nd and 3rd generations consume most generational wealth. Estimates show that 70% of 1st generation wealth is consumed by the 2nd and 90% by the 3rd generations. Their baselines might have been set too high.
Financial Mindset
We learn financial habits from our parents – either to mimic or avoid depending on the circumstances. If your parents were to gift you with a fancy vehicle at an early age, what is the message? Though you haven’t earned enough to pay for this expense, you deserve it. What does that do to the mindset of a teenager? Also, be mindful of the words you use around your kids about money. If they hear you say, “you’re always going to have a car payment.” They may start believe that and it becomes a self-fulfilling prophesy. In the end actions speak louder than words. So be careful about setting an unrealistic starting point for your children or yourself. Because if you do, where do you go from here?