A Parent’s Useful Guide To Teaching Kids About Debt

With some simple strategies, your child can be financially prepared for their future. Teach them the importance of money and finances.

It might seem difficult to teach your child the importance of money and finances, but a major part of this learning comes from observation. Children soak up information quickly starting at a young age. Research shows that by age seven, children’s money habits are set. This includes things like planning ahead and delaying gratification.

As parents or guardians, you might feel like you’re trying to outrun the clock – but fear not. Here are some simple strategies that can make learning about money, debt, and general finances easy and fun for your child.

Simple Strategies

Distinguish Between Wants & Needs

Encouraging thoughtful spending at a young age will help your child build healthy money habits as they get older. How many times have you been at the store and your child has asked for a snack in the checkout line? This is a great time to teach them the difference between needs and wants.

Teach your child that the snack they asked for is a want, not a need, and the money that would be spent on that snack could be used for X, Y, or Z. To further the lesson, ask how much they would have left in savings if they spent their own money to buy the snack. Also, ask them if they could wait until they get home for a snack rather than buying one now. Walking through the process can help your child understand your spending values and in turn, develop their own spending values going forward.

Talk About Credit & Debt

As your child grows and matures, financial topics such as credit and debt become important to discuss. Start by introducing credit – what it is, what it’s used for, the benefits of credit, and what to be careful with. These concepts help provide a foundation for children to understand credit reports, scores, and the ground rules associated with borrowing money.

Practice Being A Lender To Your Child

A learning opportunity for your child could involve lending them money for an item they want with a set repayment plan. Think of it as you being the lender, setting a certain interest rate, and safely teaching your child the importance of paying on time by making allowance deductions for them to see how borrowing on credit works.

After full repayment, evaluate the effects of this payment on your child’s savings account. This is a great opportunity to show them that credit can be used as an investment for something you don’t have the money to pay for, but in the end they’ll pay more for that item due to interest. It’s also a way to explain debt and what happens when you don’t repay what you borrowed.

Ready For Credit?

For teens nearing 18, discussing the responsibility of a credit card can be overwhelming. If you’re comfortable with cosigning on a credit card with them, make sure they know the risks you’re taking on by doing so. Talk to your child about credit card use and how they can build credit with small purchases at first. In order to set them up for success, make sure they fully understand the ins and outs of this new responsibility.

Summary

If you want your child to be financially sound for their future with good money habits, start working with them at a young age. Always remember though, you’re the parent. You set the rules. These rules will determine how your kid values money in the future and how they approach finances now and in their adult life.