How To Teach Your Kids About Debt

Teaching children about debt and financial literacy is vital to set your kids up for future success. But it’s not always easy.

Providing young adults with the right financial knowledge can keep them out of excessive debt and set them up for a healthy economic life. Often, attorneys can be great resources to consult when maintaining household finances. Consider speaking with an attorney to learn how to avoid money troubles.

Things To Consider When Teaching Kids About Debt

According to the U.S. Census Bureau, the median value of American household debt is $62,000, and things may only worsen for future generations. Additionally, the average child who goes to college ends their experience with about $40,000 in student loan debt.

You must 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. This can help kids understand financial responsibility, an essential skill that can be harder to pick up later in life.

Depending on your child’s maturity, middle school or junior high may be the right time to discuss debt.

When talking to children of any age about debt, keep the following tips in mind:

• Stay calm and be prepared for questions
• Comfort children who show stress and reassure them
• Use simple terms to discuss the household’s financial situation
• Be honest without causing distress (i.e., “We’re borrowing money to afford this house, but we are paying it off over many years.”)
• Let kids feel involved and show how they can help (i.e., “What do you think we should take back to the store?”)
• Explain your savings approach with tangible examples that affect your child (i.e., “We aren’t going to restaurants so that we can save for a fun vacation.”)
• Use props (like coins or candy) to show how to divide money and how money can add up in debt or savings
• Talk openly when you pay bills or use money
• Set a good example and be open about weekly or monthly money tasks like bill paying, balancing a checkbook, or making a holiday budget

Discuss Credit

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 can open a bank account or credit card for your child. A safer idea is to open a checking account and explain they can use the debit card and have to have money in the account to use it. This feels like credit but without the risks.

Watch out for overdraft fees and enforce paying annoying fees to teach consequences. Small purchases that are paid every month can teach good spending habits.

Discuss Credit Scores

Explain that credit is a valuable tool when both sides are paid on time and happy. A good credit history is built over time based on sound financial decisions. You can show a simple version of credit scores and mention that “good” and “excellent” are where people should try to stay.

Talk to your kids about what lowers a credit score: paying late, not paying monthly, or having too much credit card debt. Talk about the benefits of a good credit score: lower interest rates for lower monthly payments.

Explain the Difference Between Good and Bad Debt

It is crucial to explain good and bad debts. Tell kids that all investments come with risk and responsibility, but some help you overall. Examples include:

• Buying a home is considered good debt because you can use the house now and sell the home for a profit in the future.
• Bad debts might include items that are not necessary, like the latest shoes or fashion accessories. Explain that going into debt over a vacation can be risky if you need the money for something else.
• Explain the consequences of too much debt, such as losing a house, car, or TV to repossession.

Describe How Interest Works

Interest can be tricky for children to understand. Practice lending money to children and having them pay it back on time to illustrate these financial concepts. Repeat this and pay them back with interest. Use visuals to show how interest can grow over a lifetime.

Build a Budget

With a budget and careful money management, kids can save up a good amount of money for something they want. A simple budget exercise might look like this:

1. Have your child write down their “income” from chores or a part-time job, or give them a fake amount to work with, like $10.
2. Have them set a “never go below” amount of safety money. For this example, we will say $2.
3. Explain that they need to take care of “essential” items. Have them list the things they use daily and guess each item’s price. Add it up and show them the total (it does not need to be realistic). This might be $6.
4. With $8 going toward essentials and safety money, they would have $2 left. Explain saving 20% as a good practice ($0.40).
5. With the remaining $1.60, they can spend the money now or save up week by week for the item they want.

It can also help to discuss “essentials” or “needs vs. wants.” An example is asking your child if movies are essential. Explain that they are not necessary but that fun and entertainment are 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 Money Management

Explain that poor money management leads to giving things away or not buying the things they want or need. If your child is mature enough, discuss using bankruptcy to get a fresh start. Be sure to reassure your child that if you or their other parent goes bankrupt:

• The child will still receive financial support
• Some assets are protected
• There are resources such as bankruptcy lawyers that can help parents through financial hardship

Talking to your child about essential items, credit, and savings can feel silly when they aren’t footing the bills themself. But talking to them early about finances can help them understand the value of money.

When You Need Help With Your Own Debt

It is important to teach your kids about debt. However, many adults have yet to learn the importance of managing debt from their own parents. Getting into deep financial debt can be a wake-up call that you need help getting a fresh start.

If you don’t think you can manage your debts with your income, consider filing for bankruptcy. Talk to a bankruptcy lawyer about the best debt relief options for your financial situation.