When it comes to raising children, we can teach them valuable life lessons at home or we can leave it to the world to impart them. Teaching them at home is generally a far better choice — as the world tends to teach some lessons rather harshly. This is especially true of finances. Too many children grow up without any idea of how their household’s economy works. As a result, they often make avoidable money mistakes when they get out into the world. For this reason, teaching your kids about money, credit and debt should be a key aspect of their upbringing.
Good Debt vs. Bad Debt
Successful entrepreneurs will tell you there is absolutely a difference between good debt and bad debt. Good debt is taken on to acquire something capable of netting more money in return. Bad debt is taken on to satisfy a whim or provide some sort of instant gratification — with no potential for profit. In other words, a mortgage is good debt because it’s used to acquire an appreciating asset. Charging a Hawaiian vacation to a credit card is bad debt because when all is said and done, all you’ll have are some memories and a huge credit card bill.
Helping Children Understand Credit
Introduce the concept of earning money as soon as possible. Give them chores to do around the house for which they’re compensated monetarily. Have them keep their money in a clear glass jar so they can see it accumulate when they earn and diminish when they spend. When the child wants something that costs more than they have in the jar, offer to loan them the money, but explain they’ll have to repay it from their earnings — with interest. This will help them understand how credit works. Teach them how they can borrow to make money or they can borrow to buy things and show them how borrowing to make money will make it easier to buy things in the long run.
When they borrow, make sure they understand how – and on what schedule the loan must be repaid — as well as how much it will cost them to borrow the money. Yes, make them pay interest on the loan. So many people end up learning about the potential consequences of buying on credit the hard way, as these Freedom Debt Relief reviews illustrate. Teaching your kids about it from a young age will help them as they grow up and start handling their finances.
Set a Good Example
Child psychologists everywhere will tell you children learn more from observing what we do than what we say. If you want your kids to exhibit certain behaviors, you have to give them something positive to emulate. Let them see your household budget as soon as they seem capable of understanding it. Have them sit with you as you go over the accounts each month, paying bills, putting money in savings, reviewing the performance of investments, balancing the checking account and the like. Show them your budget and how it works so they can learn to establish one of their own. Explain the importance of meeting obligations on time and why it’s important to pay off credit card debt before interest payments become due.
Buy a Monopoly set, play as a family and use the opportunity to show them how the game relates to real life as you play. Teaching these financial lessons to your children at an early age will make them aware of money and how it works. Teaching your children the difference between good debt and bad debt and — most importantly — why to avoid bad debt, will position them to understand how to make money work for them, rather than vice versa.