Teaching children about debt and financial literacy is vital to set your kids up for future success. The average American household has $38,000 in debt, and things may worsen for the future generation. Additionally, the average child who goes to college ends their experience with around $30,000 in student loan debt.
This guide will help parents and educators looking to instruct children and students about debt. Youth financial knowledge can keep young adults out of excessive debt and set them up for a healthy economic life.
You need to make financial education age-appropriate and craft the conversation to each child’s maturity level. It is also essential to be honest without “sugarcoating” the hard stuff.
Middle school or junior high may be the right time to talk about debt topics, depending on your child’s maturity. However, many of the tips below can be used for younger children if you feel they are ready.
Some tips include:
Credit can be difficult for some children because they can’t see it, unlike cash and coins. First, explain that it is not unlimited money. Use simple examples to show how a child can have something.
Depending on a child’s age, you can explain that credit allows them to buy a car, home, and other essentials when they are older.
You have the option of opening a credit card for your child. A safer idea is to open a checking account and explain they can use the check card, but it must be paid off each month. This feels like credit but without the risks.
Watch out for overdraft fees and enforce your child or teen paying fees to teach consequences. Small purchases that are paid off every month can teach good spending habits.
Explain that credit is a useful tool when both sides are paid on time and happy. You can show a simple version (color-coded works best) of credit scores and mention that “good” and “excellent” are where people should work to be.
Talk to your kids about what lowers a credit score: paying late, not paying monthly, or applying for too many credit checks and loans.
It is important to explain good and bad debts. Tell kids that all investments come with risk and responsibility, but some of them help you overall. Examples include:
Interest can be tricky for children to understand. Practice lending money to children and having them pay it back on time. Repeat this task and pay them back with interest. Use visuals to show how interest can grow over one, five, 10, or 20 years, or over a lifetime.
With a budget and good money management, kids can save up for something they really want. A simple budget exercise might look like this:
It can also be wise to discuss what “essentials” are or the idea of “needs vs. wants.” An example is asking your child if movies are essentials. Explain that they are not essential, but that fun and entertainment are also important.
See if they can remove an essential item from their list to make room for movies. Then remove movies to make room for other essentials. It is okay if these are not logical examples — the important thing is to show them how limits work.
Explain that poor money management leads to giving things away or not buying the things they want. If your child is mature enough, include a discussion of using bankruptcy to get a fresh start. Be sure to reassure your child that if a parent goes bankrupt:
It can feel silly to talk to your child about essential items, credit, and savings when they aren’t footing any of the bills themselves. But talking to them early about finances will pay off.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local bankruptcy attorney to discuss your specific legal situation.