Teaching Your Kids These 4 Financial Lessons Will Help Them Avoid Debt
Hey kids, who wants to learn about interest capitalization and amortization?
So maybe teaching your kids about debt isn’t on the list of fun weekend activities. But it can help them succeed throughout their lives.
And not teaching them financial literacy now could really cost them in the future.
An April 2019 Penny Hoarder survey of more than 1,500 adults found that 17% of those who discussed finances growing up have no savings at all. That figure balloons to 40% among those who had no early financial literacy.
And those lessons don’t have to be confined to a lecture on the couch, according to Certified Financial Planner Hali London.
When she was teaching her teenage daughter about the value of money, the Bethesda, Maryland, mom said she avoided abstract concepts like credit card interest rates and long-term strategies in favor of concrete, relatable numbers.
If her daughter wanted to buy a pricy piece of clothing, London said she asked her how many shifts at her part-time job it would take to earn enough to buy the item.
“Suddenly it [made] her say, ‘Oh, I don’t want to buy that,’” London said.
By putting the value of an item in terms of the context of their lives, London said children have a better chance of taking the lesson to heart.
“Be specific about what things cost and how long it takes for them to earn that money — not their adult parents.”
Teaching kids about debt doesn’t have to be a bore — we have four ways to help your kids learn the value of being debt free.
4 Lessons to Teach Your Kids About Debt
Teaching your kids about debt doesn’t have to be a boring lesson — keep it practical so they stay engaged. Here are four lessons to teach them in a way they’ll take notice.
1. How to Avoid Debt by Budgeting
Teaching your kids to budget their money doesn’t have to involve Excel spreadsheets — unless your kids are into that.
But keeping budgeting lessons simple can have a lasting impression on young minds that may not be thinking about how their spending can impact their future.
“It’s so hard for kids because ‘long term’ for them is next week,” London said. Her basic budgeting lesson for kids: Spend less than you earn. “That can manifest itself in being more aware of what everything costs.”
If you’re looking for more concrete ways to help your kids budget, consider starting with cash. Sticking with dollars and coins rather than using digital transactions allows your children to see the consequences of spending immediately.
Check out these other tips for teaching your kids about budgeting.
2. How Interest Works
When your kids tell you to just swipe that plastic for a purchase, it could be an opportune time to teach them about how interest works.
You can get creative with your lessons for teaching your kids about how compound interest works by helping them compound the amount they save up for a goal.
Just in case you need a refresher yourself: Compound interest is a financial concept that explains how your money can grow exponentially. Your balance increases by earning interest on the interest.
And if that seems a little too complicated to start with, let them watch this video about how compound interest works (it involves a whole lot of M&Ms, which might help hold their attention).
3. The Importance of Their Credit Score
If you have teens, sending them out into the world without any understanding of why their credit score matters could leave them vulnerable to wrecking their finances.
If they don’t learn how to use a credit card responsibly, the first offer they get on campus could lead to a mountain of debt. That debt not only leaves them paying for a long time, it could also affect their credit score, which could then affect their interest rates for loans on a car or house.
If your kids understand interest rates, it may be time to explain that not all debt is bad. After all, there are some good reasons to go into debt — and ways to keep from going too far.
By adding your teenage children as authorized users to your credit card — so long as you’re responsibly making your payments on that card — you can help them build a credit score that will help them later.
If you doubt your kids are ready to handle the responsibility of having access to your credit line, they don’t even need to know they have the card — you can keep it tucked away someplace safe.
They’ll still get the benefit of a higher credit score because they’ll have the history of being an authorized user. Improving their credit score score early in life can help them score lower interest rates when they are ready to get their own card.
We’ll call this lesson teaching when they’re not looking.
4. How Student Loans Work
If you have a kid, there’s a good chance you’ve already thought about student loans. It’s tough not to have them hanging over your head when you hear that student loan debt rose to $1.56 trillion in the fourth quarter of 2020 — and that’s amid a nearly year long pandemic-induced freeze on interest rates.
The time to start teaching kids about student loans is long before they fill out their first college application.
Talking to your kids about what colleges they can realistically afford, as well as their potential earnings given their major, is a good place to start. Here are some other ways to help your kids pay for their college education without going into debt yourself.
Teaching your kids about debt — and how to avoid it — could be the financial gift that keeps on giving.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.