Tell your teens 4 basic truths about debt, credit cards and borrowing before it’s too late

Isn’t it time to have the debt discussion with your teens? In preparing your kids for the adult world of financial responsibility, help them understand debt, credit cards and borrowing before they are legally responsible. Here are some talking points to use with kids of all ages.

One: Debt is money that is owed to someone else. When you ask a person or bank to lend you money you now are in debt. The amount you borrow is the called the principle. Getting the money is the easy part; now comes the payback.

Two: Debt costs money. Whoever lent you the money expects to make some money by charging you interest. When you make loan payments you pay the principle plus some interest. Think of the interest as the monthly fee for the privilege of getting the money in the first place.

Three: Debt can be structured. When you take out a loan from a bank there is a discussion of how much and how often you make payments. Such payments get treated as a regular monthly bill, often through an automatic withdrawal from your checking account. These are usually for big-ticket items like cars and homes with the repayment period being years or decades.

Four: Debt can be unstructured and sneak up on you. When you use a credit card you are borrowing money from the credit card company. This is a one-month loan that can be paid back without any interest if you pay the full amount on time. If you don’t pay in full and on time, you now have to make payments plus interest to the credit card company.

Remind your teens that it takes personal discipline to control credit card spending and to  have the funds to make the full payment. There is no payback plan like a bank does with a formal loan agreement. Instead the credit card company sets a minimum payment you need to make to avoid extra fees that are charged in addition to the interest, usually at a very high rate. Most card statements also show how long it will take to pay off the balance if you make only the minimum payment.

With money, kids see the result of spending but they don’t see debt because debt is invisible. Kids don’t realize that people borrow money to acquire some of their tangible possessions. Borrowing can be as complex as a 25-year home mortgage or as simple as using a credit card and not paying the full balance when the bill is due.

We often talk about, “living within one’s means”, “making every dollar count,” and “spend less than you take in.” These maxims are the essence of money management, defined as having the ability to use one’s financial resources wisely.

Debt is invisible and has always been a number, the grand IOU of finances. Sure, when we give kids cash allowances they can see the money, but the only way to see debt is as a number. If you give your kids a no-cash allowance they start seeing that money coming in and money going out are numbers.

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Lynne Finch helps parents teach their kids about money from piggy banks to online banking. “It’s time to teach the kids how to manage money they can’t see or touch,” says the author of The No-Cash Allowance. Follow Lynne’s common sense approach for teaching children that money is a number with kids as young as pre-school through high school.

 

Try the “no extra cost” allowance for kids

As a parent, what runs through your head when your kids ask for money, or, horrors, ask to have their own allowances? Most likely, you immediately cringe, “Now where am I’m going to dig up money to give to the kids.” You might even blurt out the common parental fallback response, “Money doesn’t grow on trees, you know.”

Here’s how you can turn allowance for kids into a learning experience at no extra cost to you with one simple change; transfer money you are already spending on your child and have him or her manage it for certain child-appropriate expenses.

When we give money to kids in the form of cash they learn how to spend that amount of cash, generally without much thought or planning. However, if you transfer money to them as a number they would have to do some thinking and planning, along with a little math.

By making your kids think about money as a number you are helping them learn to manage money instead of simply spending it. Anyone can spend cash in hand, but it takes some planning to think of money in terms of “how much is left if I do that?”

To make your child’s allowance a real-world learning experience, start adding some appropriate expenses for your child to manage. In each case, the parent determines the amount and transfers is as a written deposit to the child’s account. The child now has that amount of “credit” with the parent who acts as facilitator at purchase time.

Vacation or Event Fund

The child is given a number that represents what he can spend with one caveat. “Don’t ask for any more money.” The child has complete ownership of the decision and the result. Parents can act as advisor, “If you buy that you’ll have $5 left. Is that okay with you?”

Activity Fund

Parent transfers an amount to child to be subtracted for participation in certain activities paid for by parent. The amount is not as important as the experience of subtracting the number from the balance which can be a small amount such as $1 for each soccer lesson. This gives the kid some skin in the game and helps him appreciate the value of the experience.

School Supplies Fund

Parent estimates an amount for school supplies at the beginning of the year for a specific list of items. The child is responsible for allocating the funds to make the purchases. The child will better appreciate the value of supplies and may re-use and take better care of supplies. It the child wants to spend more the additional amount comes out of their regular allowance. If she spends less she can keep the difference.

When your child is responsible for keeping track of money in a written account, the power of adding and subtracting come to life. By keeping track of money as a number, your child sees how every money decision affects the balance. By having your child pay for age-appropriate expenses he develops a sense of importance and sees the result of good spending decisions.

Spending decreases the balance and makes the number smaller. Each deposit  increases the balance and makes the number bigger. A decision to not spend (save or defer spending) keeps the balance from changing.

Learning to manage money as a number is an essential skill your kids will need in the future. No amount of looking at a pile of cash or a shaking a piggy bank will teach your kids the power of adding and subtracting numbers in an account.

Parents can try the no extra cost allowance to help their children understand that each money decision affects their total money resource. Kids need to see that there is a bottom line. By setting up a system as explained in my book, The No-Cash Allowance, your kids will learn that managing money is all about making decisions.