Most 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.
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]
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]
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.
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.
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.
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.
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?
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.