Lessons on avoiding debt to teach children

Hey kids, who wants to learn about interest capitalization and amortization?

No?

So maybe teaching your kids about debt isn’t on the list of fun weekend activities. But it is one of those life lessons that can help them succeed throughout their lives.

And not teaching them financial literacy now could really cost them in the future.

An April 2019 Penny Hoarder survey of more than 1,500 adults found that 17% of those who discussed finances growing up have no savings at all. That figure balloons to 40% among those who had no early financial literacy.

And those lessons don’t have to be confined to a lecture on the couch, according to Certified Financial Planner Hali London, lead planner at Facet Wealth.

When teaching her teenage daughter about the value of money, the Bethesda, Maryland, mom said she avoids abstract concepts like credit card interest rates and long-term strategies.

Instead, she uses concrete, relatable numbers when her daughter says she wants to buy a pricey item when they’re out shopping.

“My daughter works at a restaurant, and I say to her, ‘Do you know how many shifts you’re going to have to work as a hostess to buy that?’” London said. “Suddenly it makes her say, ‘Oh, I don’t want to buy that.’ ”

By putting the value of an item in terms of the context of their lives, London said children have a better chance of taking the lesson to heart.

“Be specific about what things cost and how long it takes for them to earn that money — not their adult parents.”

1. How to avoid debt by budgeting

Teaching your kids to budget their money doesn’t have to involve Excel spreadsheets — unless your kids are into that.

But keeping budgeting lessons simple can have a lasting impression on young minds that might not be thinking about how their spending can impact their future.

“It’s so hard for kids because ‘long term’ for them is next week,” London said. Her basic budgeting lesson for kids: Spend less than you earn. “That can manifest itself in being more aware of what everything costs.”

If you’re looking for more concrete ways to help your kids budget, consider starting with cash. Sticking with dollars and coins rather than using digital transactions allows your children to see the consequences of spending immediately.

Check out these other tips for teaching your kids about budgeting.

2. How interest works

When your kids tell you to just swipe that plastic for a purchase, it could be an opportune time to teach them about how interest works.

You can get creative with your lessons for teaching your kids about how compound interest works by helping them compound the amount they save up for a goal.

Pro tip: Just in case you need a refresher yourself: Compound interest is a financial concept that explains how your money can grow exponentially. Your balance increases by earning interest on the interest.

And if that seems a little too complicated to start with, let them watch this video about how compound interest works (it involves a whole lot of M&Ms, which might help hold their attention).

3. The importance of their credit score

If you have teens, sending them out into the world without any understanding of why their credit score matters could leave them vulnerable to wrecking their finances.

If they don’t learn how to use a credit card responsibly, the first offer they get on campus could lead to a mountain of debt. That debt not only leaves them paying for a long time, it could also affect their credit score, which could then affect their interest rates for loans on a car or house.

By adding your teenage children as authorized users to your credit card — so long as you’re responsibly making your payments on that card — you can help them build a credit score that will help them later.

And they don’t even need to know they have the card if you doubt they’re ready to have access to your credit line just yet — they’ll still get the benefit of raising their credit score by having the history of being an authorized user. Helping them improve their credit score can even help when they are ready to get their own card.

We’ll call this lesson teaching when they’re not looking.

4. How student loans work

If you have a kid, there’s a good chance you’ve already thought about student loans. It’s tough not to have them hanging over your head when you hear that student loan debt hit $1.5 trillion in the fourth quarter of 2019.

The time to start teaching them about student loans is long before they fill out their first college application.

Talking to your kids about what colleges they can realistically afford, as well as their potential earnings given their major, is a good place to start. Here are some other ways to help your kids pay for their college education without going into debt yourself.

Teaching your kids about debt — and how to avoid it — could be the financial gift that keeps on giving.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.