Debt

How to Teach Your Kids to Think about Debt

How To Teach Your Kids to Think about MoneyMost money lessons are fun and easy, but a few conversations are more difficult, such as talking about debt. We may hope our children never find themselves in debt, but most will experience it in some manner, whether it’s a mortgage, student loan or via credit cards. So let’s help them understand how to approach debt, because after all, not all debt is created equal.

When you’re in the process of getting out of debt, I absolutely believe you should be upfront with your kids. Most likely, they already know something is upsetting you. I suggest focusing on the changes you’re making and how they can support you, rather than going into a detailed explanation of what debt is at this time.

“Mom and Dad bought more than we should have with our credit cards, which was our mistake. The good news is we’re fixing it, and we need your help.”

Subsequent conversations should focus on working together to find ways to save money and on starting good money habits by setting family goals. Demonstrate how to use your goals as a measuring stick when you find something you want, but don’t need and let them see you choose in favor of your goals without feeling deprived.

It’s Time We Had “The Debt Talk”

Generally speaking, I would wait until your kids are junior high/middle school age and better able to understand the subject matter. I would break debt into two groups to help keep it simple and focused on the type of debt they will most likely face as adults.

[one-half-first]

Consumer Debt

Occurs when a person buys goods that generally do not appreciate over time with borrowed money, such as a credit card. This includes purchasing things like clothes, gadgets, vacations, etc. [/one-half-first][one-half]

Investment Debt

Occurs when a person buys goods or assets that generally appreciate in value over time with borrowed money. Things like buying a home, starting or growing a business or attending college.[/one-half][clear-line]

Borrowers will need to repay the cost of the item, plus interest with both consumer and investment debt.

Good Debt vs Bad Debt

Here is where things get a bit murky. Some people say consumer debt is bad and investment debt is good. To me, debt is debt. All debt has the potential to be misused or abused, which can then wreak great havoc on one’s financial life. Rather than give debt a good or bad label, I think the better approach is to teach kids the things they need to consider when borrowing money.

All Debt Has Risk

Many people willing enter into debt without understanding the risks involved. They are more concerned about what they can get in return, rather than worrying about the what ifs. No debt is fail-safe, so you need to make sure it’s worth the risk and you don’t overextend yourself. Once you start falling behind, it’s hard to get caught up again. Late payments, loan defaults or even just too much debt, can lower your credit score and impact your ability to get loans and even jobs or good insurance rates.

Debt Impacts My Choices

Most consumer debt occurs because we feed our need for instant gratification. But over time, as our debt grows, our choices become more limited. All of our money goes towards paying lenders, leaving little money to set aside for savings goals or other things you want to do. Even “good” debt can turn “bad” if we’re not careful and don’t prioritize the things that matter most.

For example, few people can buy a home with cash and therefore most mortgages are considered “good” debt. But I’ve seen too many people buy homes they technically can afford, but do not have any extra money after making their mortgage payments for other things, like travel or hobbies. It’s easy when we’re applying for a mortgage or student loans to get stars in our eyes and take the maximum amount offered. But you need to stop and evaluate what really matters in your life. We love to travel, so when we bought our home we wanted the nicest home we could afford AND still have money to travel. Travel meant more to us than buying a larger home.

Consider All Options Before Taking on Debt

We are very good at rationalizing our decisions, so it’s critical we are honest with ourselves, especially since credit cards make it very easy to shop our way into significant debt. Here are some questions we need to ask ourselves before we take on debt.

1. Why am I borrowing money? Is it a need or a want?
2. Do I need this now or could I save my money for it instead?
3. Can I afford the payments and still live the life I want?
4. How long will it take to pay off the loan and is it worth it?
5. What happens if I can’t pay back my loan?

Finding the Right Time to Have the Debt Talk

Unless your child is leaving for college tomorrow and you haven’t talked to him or her about debt, I would look for teachable moments to ease into debt conversations with your kids. Next Monday, I will layout specific ideas and conversation starters to help you teach your kids about debt without turning into a lecture.

Shannon

June 22, 2013  •  52 Comments  •  Debt

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Comments

  1. Monday, June 24th, 2013
    I find that many adults don't know the difference between good and bad debt and so they will likely struggle to articulate the difference to their children.

    I personally would like this stuff to be taught at school as it is an integral part of the world we live in and sending kids out unprepared is close to negligent.
    • Tuesday, June 25th, 2013
      Personal finance definitely needs to be subject taught in school. We deal with money every day and we need to learn how to handle it properly.
  2. Monday, June 24th, 2013
    My kids are so young...so right now we are just teaching the basics. My daughter has saved $25 in her piggy bank that she is super proud of. She also has a few thousand dollars in her college fund. However, she doesn't really comprehend that one because it's just numbers on a page and not actual money!
    • Tuesday, June 25th, 2013
      They do get so excited about the money they save, which is so fantastic to see. They should be proud! Money on paper is definitely harder to understand when you are young, but she'll definitely appreciate it when she goes to college. :)
  3. Monday, June 24th, 2013
    You've talked about this before, but I think one of the hardest parts of talking to your kids about debt is the shame involved. But if you can get past that and really be open with your kids, not only are you helping them learn but you're also adding brains to the operation that might be able to help you improve your situation. Kids are really smart and because they have different experiences than us, they will have different ideas about how to approach problems. They could bring a unique viewpoint that ends up really helping. And at the very least, as you say they will hopefully have a better understanding of why you're making the choices you are.
    • Tuesday, June 25th, 2013
      I agree wholeheartedly, Matt. We don't give kids enough credit. Yes, there might be some pouting at first if drastic changes are being made. But once they get onboard (which happens faster than you think), they really look for ways to help out.
  4. Jake @ Common Cents Wealth
    Monday, June 24th, 2013
    This is a great post. My parents were very good at teaching us how to handle our finances and distinguishing the difference between good and bad debt. It is because of them that I never really fell into any bad/consumer debt. I had some student loans and now a mortgage, but both of those are giving me great returns. It may be hard to talk to kids about money, but it's better that you do instead of just ignoring it and then having them make some big mistakes that could've been avoided.
    • Tuesday, June 25th, 2013
      That's wonderful your parents taught you how to think about debt, which helped you leverage it properly. Ignoring problems never makes them better and helping kids understand money - the good and the bad - prepares them to succeed as adults.
  5. Monday, June 24th, 2013
    I agree with Glen that finance should also be taught in the schools. I don't have much to add since I'm not a parent. My mom and dad explained the basics to me but I understood what I needed to from a young age just by watching and listening. I think it also helped that I started my paper route from a young age so it really had me thinking about money early.
    Great post!
    • Tuesday, June 25th, 2013
      It sounds like your parents were great role models, Mr. CBB. Lots of kids learn by watching and listening and unfortunately they don't always witness the best financial model behavior to model. I agree handling and earning money at a young age can really instill some great money habits.
  6. Monday, June 24th, 2013
    As a previous debt-a-holic, I plan on teaching my son about debt. He is definitely not old enough now, but when he starts asking questions about money, then I will show him lessons that I learned. I don't want him to go through what I did, but if he does, at least he will have the tools to take care of it.
    • Tuesday, June 25th, 2013
      You'll have many great money lessons to teach your son and he will have a great money role model in you. Having an open relationship with him regarding money and your money mistakes is a great gift to give him. He'll know he can come to you for guidance.
  7. Monday, June 24th, 2013
    This is an awesome post. My mom is great with money, but being the stubborn child that I was, I had to learn things that hard way.
    • Tuesday, June 25th, 2013
      Thanks, Marissa! Sometimes we do have to learn the hard way! :) The good news you have a great Mom to give you some support and debt is reversible.
  8. Girl Meets Debt
    Monday, June 24th, 2013
    Another fantastic post in this series Shannon! I'm the perfect example for my future children how debt can impact lives in a negative fashion but I'm hoping by the time I have children or at least until they are old enough to understand then my debt will be a thing of the distant past!
    • Tuesday, June 25th, 2013
      Thanks, GMD! I have no doubt your debt will be a distant memory by the time you have children. You'll be able to teach them how to live a "rich" (including great shoes!) on a budget!
  9. Monday, June 24th, 2013
    Since we do not have children I do not need to worry about having that talk. But the point you made about yourself when you said "We love to travel, so when we bought our home we wanted the nicest home we could afford AND still have money to travel. Travel meant more to us than buying a larger home. " is something I wish I had put more thought into before we had our dream house built.

    Now that we are renting and basically saving to start over again, we will definitely keep that in mind should we decide to purchase another house.
    • Tuesday, June 25th, 2013
      It's something that I saw quite a bit, so you are definitely not alone. It's easy to get caught up in building or buying your dream house and forgetting about all the other things you love to do too.
  10. Monday, June 24th, 2013
    We are already having these conversations with our son and daughter who are 10 and 12. The neat thing is that they get it already and see debt as something they do not want to have. It really bothered my son this past school year when he forgot his lunch one day and the school allowed him to purchase food on credit. All he could talk about that night was making sure he had the money the next day to pay the lunchroom manager so he could get out of debt. That's cool!
    • Tuesday, June 25th, 2013
      Wow! What a great story, Brian. It's great that he is only 10 years old and doesn't like being in debt. It's amazing how powerful money conversations with children are. It's unfortunate more parents don't realize this because they truly do make a difference. The girls always surprise me with how much they comprehend.
  11. Greg @ Thriftgenuity.com
    Monday, June 24th, 2013
    I like the separation of good and bad debt. That surely needs to be instilled and understood by the children. I think that it is worth reminding the kids that all debt has risk during their college search and begin to determine what degree they want to pursue. It perhaps can bring more levity into the decision they are about to make.
    • Tuesday, June 25th, 2013
      It's definitely important for kids to understand all debt has risk. College is a great time to really get into the nitty gritty of debt. For most kids, this will be the first time they get real hands on experience with debt. So they do need to think about how much they are willing to take on in comparison to what they will likely earn. To understand how much of their paycheck will automatically go towards those debt payments (along with all their other living expenses). Kids won't naturally think of those things themselves, so we need to bring it to their attention and help guide their decisions.
  12. Corina Ramos
    Monday, June 24th, 2013
    I always remind the kids about our debt mistakes and encourage them not to follow in our steps then but to look at how we're managing our money now.

    After our son started working my husband gave him his truck which is paid off. We're still paying the insurance but we handed him the responsibility of maintenance.

    He's realizing now the importance of managing money and I'm so proud that he's putting money away and only using whatever money he allows himself on hand. Gives me that peace of mind that he'll be okay financially.

    The other two kids aren't working but they earn an allowance and they are also saving their money, it's great.

    Have a great week Shannon!
    • Tuesday, June 25th, 2013
      I think it's wonderful how upfront you are with your kids. Letting them know you're mistakes, but always reminding them how you've made changes and that's what they need to model. It's great your son is understands the importance of saving and living with his means - great traits and habits to cultivate. One of the greatest gifts you can give your kids is to teach them how to handle money and you're doing a great job teaching them, Corina! You have a wonderful week, too!
  13. Tuesday, June 25th, 2013
    I agree debt is debt. My parents never really talked to me about debt and I never had a clue what it was, until I saw some of my fellow college students grappling with it. My parents are from an older generation and have always lived on the cash they had. So although we never had 'the talk', we kind of did. Nice post!
    • Wednesday, June 26th, 2013
      It's very true that debt wasn't as prevalent for older generations since they didn't have access to credit cards. The only loans you had were for your home and possibly your car. Other than that - if you didn't have the money, you didn't buy it. Now days we do have to have the debt talk because it's very easy to live beyond our means.
  14. Kevin @ RewardBoost
    Tuesday, June 25th, 2013
    I learned about real debt when I was 15. I wanted a car so I took out a loan (on which my step-dad cosigned) and bought a car. Then I spent the next four years of my life working part time jobs to pay off the car loan, pay for gas, insurance, and repairs.

    I think you can talk to your kids all you want about debt, but until they experience it in a very real manner it won't stick.
    • Wednesday, June 26th, 2013
      You learned a valuable lesson at young age. Unfortunately most kids don't get firsthand experience with debt until they are on their own, typically paying of their student loans. Parents need to make sure kids understand what debt is and how to handle it properly so kids don't mistake it as free or easy money until it's too late.
  15. Tuesday, June 25th, 2013
    I agree about considering the other aspects in life that are important to you when taking on debt. We're considering buying a house in the next couple of years, and there's been a lot of discussion about trying to balance what we're willing to spend on a house versus what's important to us like travel to visit loved ones, experiences, etc. (we agree for the most part, though I'm less comfortable with buying a house with SD prices that we'll have to pay off for quite awhile that aren't all that impressive looking!).
    • Wednesday, June 26th, 2013
      Real estate in California is tough! I'm glad you're balancing your other priorities and passions against what you want to pay for your home. A home is a wonderful investment but it can turn into a prison when you don't leave yourself enough money to do other things you love too.
  16. Tuesday, June 25th, 2013
    Great advice, Shannon. Again, as you know, I won't be having kids for a long time (if all goes as planned haha) but this is definitely a good "blueprint" for talking to your kids about debt.
    • Wednesday, June 26th, 2013
      Thanks, DC! When the time comes for you to be a Dad - you are going to be so prepared! :)
  17. Wednesday, June 26th, 2013
    I'm with you on the "debt is debt" thought. We are advising our children against debt in general, but we are going to educate them that if they do choose to take out student loans or a mortgage loan, to do it in a way where they can have it paid off ASAP, and to borrow as little as possible. Terrific post, Shannon!
    • Wednesday, June 26th, 2013
      It's definitely a delicate balance to teach kids when it may make sense to leverage debt - buying a home, starting a business - to when they should generally avoid debt. To me, if they have a clear understanding of why they need to borrow money and have a plan to tackle that debt and pay it as quickly as possible, then they are starting from a good place.
  18. Rita P
    Wednesday, June 26th, 2013
    Agree, kids must be taught about debt right from small age. I wish my parents had taught me the same. They were good in managing finance and stayed away from debt for several reasons & by teen age I was away from home. Anyways I had to learn it hard way but making sure to teach our kids, Thanks for wonderful post.
    • Thursday, June 27th, 2013
      Thanks, Rita! Many parents do many things right but neglect to talk about debt. It's something most of us face in some shape or form and knowing how to approach properly is so important. I'm glad you're teaching your kids about debt, so they know how to leverage it properly.
  19. Wednesday, June 26th, 2013
    I LOVE this Shannon, I'm actually bookmarking it. I wish I knew all of this when I was a kid...
    • Thursday, June 27th, 2013
      Thanks, Catherine! I appreciate your kind words. The good news is you'll be able to pass along all this knowledge to your baby girl. :)
  20. Wednesday, June 26th, 2013
    Hey Shannon, I really like that you don't bother with labeling debt "bad" or "good" debt. As you so excellently pointed out, all debt can become problematic if it starts to run away from you. I've started talking to my daughter about finances and debt and your articles have been really helpful. So thank you, my friend!
    • Thursday, June 27th, 2013
      Thanks, Lindsey! I'm thrilled to hear you're talking to your daughter about money as I know you wanted to do so but weren't quite sure how to start the conversations. I'm glad I've been able to help and hope the conversations are going well. Keep me posted, my friend! :)
  21. Thursday, June 27th, 2013
    An important post and well written to boot, Shannon. I'll bet science supports the idea of waiting until Junior High too. Finances use a lot of math and math is incredibly abstract especially when it comes to personal finance and interest and all that, thus developmental stages must be a consideration. As a long time educator, I know not to teach guitar harmony until high school unless I am working with an extreme talent. They just can-not get it. Have a happy Thursday!
    • Thursday, June 27th, 2013
      Thanks, CJ! College is also on the horizon which is where most of them will experience debt for the first time via student loan and/or their first credit cards. It's best to prepare them before they have a chance to get hip-deep in debt and can understand what debt is. Happy Thursday to you too! :)
  22. Troy
    Thursday, June 27th, 2013
    Great post. My parents used to teach me that if I went into debt because I wanted to buy something (unless it was real estate or my education), then it would definitely be a big no-no. But if it's for an investment in my future, then that's a whole other story.
    • Thursday, June 27th, 2013
      Thanks, Troy! It's great that your parents talked to you about debt, so many don't. Debt when leveraged properly can absolutely be worth it, but so many people go into debt over a desire to instantly satisfy a want. Thanks for stopping by and commenting. I appreciate it!
  23. Friday, June 28th, 2013
    My dad was a banker, so I knew about debt earlier than others might have learnt about it. At 16, I was a cosignatory on their card (he trusted me that much evidently). I've always been great with debt - always repaid on time, and the like. I gather I'm pretty lucky to have had such a good run with it, but I am a cautious person with money!
    • Friday, June 28th, 2013
      Thanks for stopping by and commenting, Sarah. I really appreciate it! It's great that you've always had a great handle on debt as that's a skill you definitely want to cultivate. :)
  24. Saturday, June 29th, 2013
    I dont think there is a such thing as good debt any more. Student loans at one point were arguably good debt. Those days have passed.
    • Sunday, June 30th, 2013
      People definitely need to weigh all their options before taking on any type of debt, which unfortunately doesn't happen enough.
  25. Sunday, December 28th, 2014
    Kids are fast these days, and it is really more important to have them learn about debts, and help them understand even the basics of it just to help them have a grasp on how it works, the cause and effects, and why it is important for them to know about these things as early as possible.
Shannon Ryan SHANNON RYAN, CFP®
  • Meet Shannon

    "As a Certified Financial Planner, it is my passion to help individuals and families build a healthy relationship with money. I look forward to helping you raise financially confident kids.” - Shannon Ryan
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