Plan ahead to save from borrrowing

Some parents are encouraging their children to save up for something they want which is great.  However, mostly they are saving towards short term financial goals – such as buying a new bike, an ipod, or a cell phone.  When they reach their goal – they empty their bank account and start saving towards the next “thing” they want to buy.
 
While this is a much smarter move than buying things on hire purchase and paying interest it does nothing about saving towards long term financial goals such as studying, buying a car, a house or providing for your retirement.  
 
When budget advising I have noticed that buying a car or taking on a student loan are often the first times people borrow money.  With some forward thinking this can be prevented, especially borrowing money for a car.
 
I suggest around a child’s 12^thbirthday you do this exercise with them.  There is no specific age really, but the sooner the better. Look at the price of cars, at car dealers, trade me etc to get an idea what cars are worth.  Discuss cost of insurance, registration, warrants of fitness, petrol, and the cost of repairs. 
 
Find a car your child likes and pretend you are going to buy it with finance – work out the cost of the car with borrowed money.  Then do the same exercise and pretend you are saving up for the car and paying cash.  Include saving up for one years cost of insurance, registration, and the warrant of fitness as well.  (an estimate of around $1,000 extra)  Then work out how much your child would have to save until they are ready to buy a car – say around 17 years old.
 
If they chose a car worth $3,000 then add a $1,000 (for the insurance, registration etc) they would have to save $4,000.  From 12 years old to 17 years old is 5 years.  5 years x 52 weeks is 260 weeks that they would have available to save for they car.  Your 12 year old would need to save $15.38 each and every week until they are 17 years old to buy a car worth $3,000 and be able to insure and register it for a year. 
 
I suggest having two savings accounts – one for short term goals (under a year) and one for longer term goals (over a year) to help keep kids focused on future financial goals.
 
It may be a challenge for a 12 year old to save $15.38 per week, however the point of this exercise is to get you and your child planning and saving for the future instead of saving up for short term goals, emptying their bank accounts and starting again from zero.