Teaching Your Children About Debt

Teaching Children About Debt

Teaching Children About Debt

Children often mimic the behavior around them and the way they learn a great deal about relationships, society and the economy from the way their parents interact with the world. At the same time children have their unique personalities which color how they react to the world around them and the things you teach them. Sometimes it can be a complex thing just to teach your child a new ethical principle or a life lesson.

So how do you teach your children about finances and debt?

Well research tells us that the more likely you are to be a big spender who throws money around recklessly, the more likely it is that your child will be the same way when they grow up. Before you even begin to teach your children about debt they have most likely already gained an opinion from your behavior and attitude towards money. So the first lesson would be to demonstrate to your child what good spending habits are and how to pay debt responsibly and save money at the same time.

So how exactly can you do that?

Consider how you talk about money around the house

Is it never mentioned or is it a constant source of conflict? Have you mentioned money troubles to your children before, have you complained about being in debt to your children? Consider how you have talked about money and debt in the house and decide if may be having a positive or negative impact on your children’s understanding of finances and debt.

Children will copy your behavior after all, so if paying the bills or doing the taxes is an overwhelmingly negative experience for you, and you complain loudly about it, expect your children to probably adopt the same demeanor. You don’t even need to vocalise your negative sentiment towards the bills you are paying, children can often sense stress in their parent and might have picked up on negative feelings concerning your finances.

What do children do when confronted with something they perceive as painful? Well they try to avoid it. So if managing your bills is something you don’t want to do and your children pick up on that, they will be more likely to avoid paying bills on time when they are older and see managing finances as a stressful and annoying thing.

Is it merely a tool for paying for things that you manage frugally, or do you have a habit of spending extravagantly on pay day? Do you kids understand what day you get paid because you suddenly take everyone out to an expensive dinner when you are flush with cash, then struggle for the rest of the week?

Your attitude to money will also inform your children of how they should use it. If you have a habit of spending extravagantly during the times you do have money, you might be setting your child up to repeat the behavior.

Think about how you say no to your children when it comes to money (and setup delayed gratification and the concept of saving)

If your child asks for money to buy a toy, do you always say yes? If you say no, how do you justify it? Do you tell them you are too broke or do you tell them they need to earn the money for the toy themselves, or at least partially contribute. If children always get what they want, they will not understand the concept of delayed gratification.

If you tell them you are too broke how will that change the way they perceive money and you, especially if they think money equals success. The best bet is often to instill a work ethic and sense of delayed gratification by giving your child routes to earn rewards through hard work. So make a deal with your child. Set out some simple chores and a timeline to obtaining the toy (the reward), so after a few weeks of hard work they get what they want and they begin to understand the dignity and happiness in working for what you want in life.

Teach them what borrowing is

From a relatively young age, you can instill the concepts of borrowing, debt and repaying debt. In the previous example you may have taught them about saving for something they want, and appreciating that work is attached to acquiring money. Well the other option is to buy the toy for them and tech them about having debt.

It is important to not do this on impulse. You should set out the ground rules before even entering the toy store including a repayment plan and how the child will earn the money. You can make a deal with your child, including some basic paperwork that sets out their obligations in very simple terms. Make it a short transaction so they can obtain the item and pay it off quickly. Later on they can get more costly items with longer repayment terms, but at first you want them to stick to the plan and follow it through quickly.

Include a small amount of interest if you like, so your child understand that the quicker they pay off the item, the better it is for them. Once they understand the concepts of debt, repaying debt and interest payments, then explain to them that your other bills are paid in the same way and that this simple concept helped you buy a home and buy your car.

Talk about balancing repayments and living expenses

Make sure your child understands that they need to split up their income in a proportion that makes sense. Say you give them $10 pocket money a week, and they earn another $20 by doing various chores around the house. If they have certain things they like to spend their money on, like a weekly trip to the park where they have to pay for public transport, make sure they include these costs in their debt repayment calculations.

Sit down and create a spending plan with them which includes debt repayments and weekly expenses that they always spend pocket money on. This will help them understand the balance between living costs and getting into debt for luxuries.

Introduce more complex debt scenarios

Once your child has paid off their first loan, you could see how they go with 2 simultaneous debts, and to spice things up you could increase the interest rate on the second loan. Just wait until the child thinks up the idea of a second loan on their own. When they come to you, suggest that the loan may be available, but it will include a 10% interest rate instead of 5%.

Take this opportunity to explain that they should look at increasing their income as well, so they can pay off the debt faster. Make sure you link that faster debt repayment to an additional reward, so you could even link it to a $10 “early repayment voucher”. This will create an incentive to paying back debt earlier and help them understand the value of frugality after getting into debt.

Help them get started on real world financial matters

You can help your teenager get the hang of credit cards by co-signing for a membership card or a gas card. They will have to learn to manage these real world debts and keep them under control. Watch for any potential problems and don’t be a soft touch with them. If they screw up, take the card away for a few weeks.

When they start having real world debt, encourage them to get a real world job. By the time they are 16 they should have some kind of part time job, even if it is just mowing lawns for the neighbors.

Make sure they understand how college debt will work as well, so they don’t overspend on luxury items and consumables when going to college. This will most likely be the first major debt they will carry forward into adult hood, so make sure you really give them the knowledge to handle this big step!

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