As any seasoned parent will tell you, it doesn’t take kids very long to start asking for stuff. Eventually, they’ll learn that some things cost more money than they have. Most caregivers make the best suggestion of saving up for want their kids want, but this isn’t the only option kids have. Instead of always having them save, you might take the “I want…” moments as opportunities to teach them to handle debt well. Along the way, you’ll want to pass on these five key points.
1) Just because debt is common doesn’t mean it’s okay.
Although the number of people in debt varies from country to country, in the wake of the Great Recession, having debt is almost expected in many regions. Seeing it so often might give kids the impression that borrowing isn’t a problem, but the reality is, debt can have a crippling effect on communities and the larger economy. People who owe have significantly less to spend to support businesses or other organizations, which can make social systems crash, too. Not only that, but having debt can be really stressful, with people constantly worrying about how they’re going to cover costs.
2) Strategically taking on a little debt actually can make you more financially stable later.
In some cases, borrowing brings you into a better financial position in the long run. For instance, if your kids borrow money for a good college education, the investment might mean they get a much better job that pays significantly more. In the same way, a person can take a loan to start a successful business or buy a property to rent at a profit. Plus, responsible borrowing establishes a good credit history, which might mean your kids qualify for better rates and save money in the future. For these reasons, avoid teaching your kids that debt is hands down “bad.” It’s not. They just need to have a good plan and do their research.
3) Debt usually means you pay more for something in the long run.
Although lenders occasionally draw up agreements where borrowers don’t pay any fees or interest, it’s not the norm. Lenders know that any borrower, even one with good credit, presents a little bit of risk, so they protect themselves with these charges. Your kids might get what they want sooner if they borrow, but the end cost of whatever they buy is likely higher than if they didn’t get a loan. There are some cases where getting something now is actually an acceptable tradeoff for the higher cost, such as if your car dies and you take out an auto loan, permitting immediate, reliable transportation to your job.
4) Some types of debt are better than others.
Some types of debt are “good,” meaning they have the potential to earn kids money over time. Other types of debt are “bad” because they involve items that won’t go up in value, or which won’t generate more money. Examples include cars and clothing. Teach your kids not to borrow for anything that’s going to depreciate if they can help it.
5) Not paying a debt can get you in trouble with others, including the law
With TV, radio and Internet commercials all screaming about how easy it is to get debt forgiven or erased, kids sometimes believe that racking up debt is no big deal. Debt can have big consequences that kids shouldn’t take lightly. If your kids don’t pay their lenders, the lenders might start hounding them to collect what’s owed. They might even sue, forcing your kids to appear in court. Even if your kids avoid a lawsuit, not paying debts can ruin their credit reputation and rating, making it nearly impossible for them to get out of their financial hole.
The odds are fairly high that your kids or someone they know will have to take out some kind of loan. This makes it really important for them to understand what borrowing really entails before they sign on the dotted line. You shouldn’t necessarily paint debt as bad, but rather should explain that it’s borrowing without a plan or for things that end up losing value that’s potentially dangerous. Your kids should know that, well-managed, a little bit of good debt goes a long way toward providing financial gains.