Like all money skills, debt is an important concept we should be explaining to our kids early on so they won’t fall prey to its grasp later in life. We have compiled five tips on what to cover and how to explain the concept of debt to your children.
Good Debt vs. Bad Debt
When explaining debt to kids it’s important to make the distinction between the good and bad. The financial definition of debt is Something that is owed, such as money, goods, or services. But not all debt is bad. In fact, a lot of it is necessary for building a healthy, financial future.
Here are 5 tips to guide your discussion on the pros and cons of debt
Tip #1: Good Debt
Good debt might sound like an oxymoron but it’s not. Good debt helps increase a person’s net worth and value – especially in the eyes of the banks that lend money. Of course, it’s important to note that debt can only be good if it’s paid back – and on time. Examples of good debt can include a home loan, a car loan, student loans for, and borrowing money to start a business.
Tip #2: Band Debt
Bad debt is obviously the opposite of good debt in that it’s made by spending money on goods and services that don’t necessarily increase your net worth or value. It can also be characterised by someone spending outside of his or her means. Think of big-ticket items such as big flat screen TV’s, expensive clothing, technology gadgets, and a luxury holiday. While these things are nice-to-have (and might be fun), they don’t necessarily increase your net worth. In fact, they do the opposite – they drain your bank account, especially if you don’t have the money to pay it back.
Tip #3: Credit
Don’t use a credit card to purchase items if you can’t pay the bill in full and on time. In our last article, we introduced the concept of buying things on credit and how important it is to pay bills on time to avoid high-interest fees. This concept is even more relevant when explaining debt to children because a credit card is the easiest way to get into bad debt – and fast.
Tip #4: Kid In A Candy Store
Like a kid in a candy store – you don’t need to eat (or buy) all the candy – It’s important for children (and adults) to understand that just because you have a big line of credit (a large sum of money to spend) doesn’t mean you need to spend it all at once. Credit card companies tack on huge interest fees and if you don’t pay your bills in a timely manner, chances are you’ll end up owing more money in fees than the original cost of the item you purchased. Like that kid in the candy store eating too much – you’ll probably be just as sick.
Tip #5: Borrowing
Don’t let your children borrow money without putting a payback system in place. There’s nothing wrong with letting your children borrow money since chances are they don’t have any of their own – yet. But it’s important that kids understand from an early age that nothing in life is free. Try putting a system in place that requires them to pay you back. It reinforces responsibility, one of the most important traits they can take into adulthood.
Teaching children the difference between wants and needs can go a long way in helping them stay ahead of the debt game and give them the foundation to understanding the difference between good and bad debt so they can build a healthy, financial future.
You might be reading this thinking you have not exactly followed this advise yourself, have you considered debt counselling to get your financial health in order? You could save up to 60% on your monthly debt repayments. Contact us today if you would like more information.