The story is all too common: A college student takes out a hefty sum for their student loans, fails to make timely payments and ends up sabotaging their financial future. Usually, they don't realize how much of a mistake they're making until it's too late.
If only these students had parents who took the time to teach them about debt. Despite the fact that Americans owe over $12.29 trillion overall in debt, most children go into adulthood with an inadequate understanding of borrowing and the potential consequences.
Read on for advice on how to teach your kids about debt – from parents who just happen to be financial experts.
Borrowing from the Future
What children may fail to understand about debt is the concept of paying for things today with money from tomorrow. It's important for them to grasp this idea – and the risks involved – before they're old enough to open a line of credit.
Personal finance expert Doug Nordman of The Military Guide said he taught his daughter not to make borrowing a habit by making her work for anything she wanted above her normal allowance.
"Once in awhile I'd be asked 'Dad, can I borrow $5?'" he said. "The answer was always 'No, the bank does not lend money – but I could use some help mowing the lawn for $5.'"
You can teach your child the satisfaction of saving by giving them an allowance or money for chores and letting them buy their own toys. You could also run a reverse experiment and let them borrow money and pay you interest every week. This type of hands-on approach is almost always more effective than a dry lecture.
Let Them Make Mistakes Early
Many people's first introduction to debt is a credit card. For most, that comes sometime in early adulthood – even as early as 18.
Instead of letting his daughter experience newfound financial freedom while away from his watchful eye, Nordman signed his daughter up for a credit card at age 13.
"[That] helped her experience all those financial mistakes at home instead of at college," he said.
The laws on teen credit have changed since then, barring anyone under the age of 18 for applying. But many credit card issuers still allow teens to be authorized users on their parent's cards. You can set a spending limit, show them monthly statements and allow them to see what it's like spending on a credit card versus a debit card. Allowing access at that age will also help build their credit early so they can have a secure financial foundation.
Explain Why Debt Can Be a Good Thing
If you have debt, it may be beneficial to explain to your child why you borrowed money – and why it's been helpful for the family. For example, if you have a mortgage, you can explain to your kids why it's better to owe than to rent in your city. If you took out money for student loans, teach them why getting a degree (even with loans) can mean a better salary in the future.
Older students could also learn the value of rental properties and why owing money now could pay off later. Parents with small businesses can explain why they took out lines of credit or loans to grow their idea.
The key is not to scare your child away from taking on debt, but to make sure they understand how to reap the benefits and avoid the consequences. Everyone needs to take out a loan or open a line of credit at some point – make sure your child knows how to do it responsibly.