Two discussions give parents the cold sweats. Telling your kids where babies come from, and telling your kids where debt comes from. Children will learn a lot about money from simply observing their parents. Do you shop around before buying? Do you use coupons at the grocery store and proudly crow, “I just saved us BGN 13.97!” Do you gripe about bills and get calls from debt collectors?
Have you had to announce that due to unforeseen financial circumstances, this year’s family vacation will be spent in the backyard kiddie pool instead of Disneyland in Paris? Whether you like it or not, your kids are going to learn about money, debt and financial behavior from you. So, when and what should you tell them?
Factors to Consider When Telling Kids about Debt depends greatly on their age, maturity and resiliency, but a basic rule is to start slowly.
It’s silly to discuss bankruptcy law with a 5-year-old. They can, however, learn the basics of budgeting and that coins are not just shiny objects to swallow. Tell them to put some of the money in a jar for spending, some for saving and some for charitable giving. If they see a toy they want to buy but don’t have enough money, great. That should hopefully instill a goal-oriented work ethic and the importance of putting more of those tasty coins in the saving jar. That’s also a good way to introduce the concept of debt. If they’re BGN 5 short of buying that toy, give them the money, but explain it is not a gift; it is a loan. They are in this thing called “debt” until they pay you back. You can even tell them that they have to pay you back a little extra just for the privilege of borrowing your money.
That is called “interest,” kiddos. You don’t want children to learn about it the hard way, like when they turn 18 and sign up for their first credit card that comes with 23.5% interest rates. Teach kids the difference between good debt and bad debt. Good debt is borrowing money for things that theoretically increase in value, like a house, or increase their earning potential, like a student loan. Bad debt is money spent on things that lose value almost immediately like cars, clothes, etc. This is also a good way to turn the discussion to the difference between wants and needs. Basic concepts like budgeting, saving and paying down debt are as essential to grasp as learning to brush their teeth.