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.
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.