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How to Teach Your Kids About Debt

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.

Factors to Consider When Teaching Kids About Debt

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:

  • Stay calm and be ready for questions
  • Comfort children who show stress
  • Use simple terms to discuss the household financial situation
  • Be honest without causing distress (i.e., "We bought too much today with our credit cards, which is a mistake. But we are going to fix it.")
  • 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) 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 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.

Discuss Credit Scores

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.

Explain the Difference Between Good and Bad Debt

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:

  • Buying a home is considered good debt because you can sell the home one day.
  • Bad debts might include vacations or items that are not necessary. Explain that going into debt over a vacation can be risky if you need the money for something else.
  • Explain the real consequences of 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. 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.

Build a Budget

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

  1. First, have your child write down their "income" from chores, or give them a fake amount to work with. Let's say $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 make a fake list of the things they use every day and guess each item's price. Add it up and show them the total (it does not need to be a realistic total). This might be $6.
  4. With $8 allotted into 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 really want.

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 Money Management

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.

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