Talking to your kids about debt or finance, in general, is challenging and necessary to help them build better money habits. Luckily, finance has become a more common topic in many households today.
Financial habits are often passed along to children from parents though they aren’t inherited. Kids often learn any habits for that matter by watching mom and dad. Teaching children about money is an important role of being a good dad or mom.
There are plenty of age-appropriate debt topics to bring up with your kids at every stage. Doesn`t matter if your kid is 4 or 24, it’s never too early—or too late—to help build financial knowledge.
Here’s how you can give your kids a head start and help them become financially confident and responsible.
How to Teach Pre-Schoolers and Kindergartners About debt
Teaching children the basics of debt in simple terms is the best way to start. Parents can help them make wise financial decisions in the future
- Use a clear jar to save.
The piggy bank or a clear jar is a great idea, it gives kids a visual. The kids can see the money growing in a jar
- Show them that things cost money.
“Well, son, that toy Dino costs 500 rupees” Suggest they take a few hundred out of their jar and make your kid physically hand the money to the cashier. This lesson-oriented action will have more impact than a ten-minute lecture. You can also Practice being a lender to your child.
- Visual aids always come in handy when teaching kids about debt.
Visual aids can help children understand debt more clearly and the knowledge will serve them well in the future.
Here are some examples of visual aids which can be used to explain debt to children:
• Charts and graphs: Borrowing and paying back money with interest becomes easier to grasp for young minds with charts and graphs.
• Flashcards: Flashcards help children understand Debt related terms like “interest rate” and “credit score.” in an interactive and fun way.
• Videos and animations: There are many online resources and platforms like YouTube that offer free videos and animations to show how debt works and also other financial concepts.
• Games and simulations: Kids will get to know how their financial decisions or choices can affect their debt levels.
Few more fun ways to make kids learn financial concepts
Most have played Monopoly and this a great game for kids to get familiar with the dealings of money.
Monopoly players buy and trade properties also develop them and collect rent from opponents to become the richest among all the players and force the opponents to bankruptcy.
There are also other games available online:
• Pay Day
• The Game of Life
• The Allowance Game
• The Stock Exchange Game
• Sub Shop Board Game
• Money Bags
• Buy It Right
• Act Your Wage!
Peter Pig’s Money Counter for Younger Kids
Stock market game for older kids
How to Teach School Children about Debt.
At this age, your children should be able to gauge decisions and understand the possible results.
• What is debt? Explain to children that debt is money that is taken and must be returned with interest. Give examples like borrowing money from a friend but paying back the borrowed amount with interest later.
Different types of debt. Make your children aware of different types of debt, such as good debt and bad debt.
Good debt is debt that is used to invest in something that will increase in value over time, such as a mortgage for a home or starting a business (business loan), or education (student loan).
Bad debt does not provide any long-term benefits and is not always easy to pay off, e.g.- credit card debt.
• Teach your children about interest rates and how it increases over time. For example, explain that if you borrow 100 with an interest rate of 10%, you will have to pay back 110.
• Discuss the consequences of debt. Explain the consequences of borrowing if it is not managed responsibly. For example, if you don`t make payments on time for the borrowed money credit scores can be damaged which will make borrowing in the future difficult.
- Use real-life examples.
Make the concept of debt more concrete for children by using real-life examples like a loan from a friend or family member. A mortgage for a home. Credit card debt: Car loans.
- Don’t’ encourage commissions.
Avoid paying for chores. Chores are supposed to teach children to be self-sufficient Doing chores leads to empathy, lower anxiety and increase self-confidence, and many more.
- Stress the importance of giving.
Once they start earning a little money make them avoid impulse buying for unnecessary wants, be sure you teach them about giving and kindness. Then can choose the ways to be charitable, say donate books or clothes to the poor out of their saved pocket money
How to Teach Teenagers About Money
- Giving them the responsibility of a bank account also emphasizes the importance of budgeting.
By the time your kid’s a teenager, he or she should be able to open and handle a savings account. This will make their money management to the next level and add to their financial responsibility.
Stress on budgeting their needs and incomes so that they can save for the upcoming college education fund and if possible if there are ways to avoid student loans which will lessen their financial burden in a significant way.
Though covid-19 brought relief for some student loan borrowers, the debt is not canceled entirely.
Let your teen know that student loan isn’t the only option to fund their education. Talk through all the alternatives out there, like applying for scholarships or working part-time during summer breaks.
- Teach them the disadvantages of credit cards.
Find Teachable Moments to Explain Debt. As soon as your kid turns 18, they can opt for credit cards. If you don`t teach them how debt works they will become another credit card victim.
Social media platforms can help young people enlarge their financial literacy.
- Teach them contentment.
Your teen probably spends a lot of their time staring at their mobile phones and looking into their friends’ social media and this will make them fall for comparison trap.
Let your teen know everybody has different lives and it’s not about the amount of money but the happiness you have in your heart that counts and end of the day a good night`s sleep is the best reward money can offer.
- Exemplify Responsible Debt Teach them to be responsible borrowers.
Make the debt transaction very official. Prepare paperwork that outlines the terms of the loan and have both the parties that is, you and the kid; sign it. Include things like: The total amount Interest rate: Payment schedule: Payment due date: Non-payment penalty:
Make kids investment savvy- Raise a Buffet
Introduce kids to the magic of compound interest and raise an investor like Warren Buffet who started investing at age six. The Sooner your teen starts investing, the better.
Make your kids read about the bigwigs of the financial world and how they made it big. It is also very important to encourage your kids to save and it can help them avoid debt. They should know the money saved is money earned.
A study shows kids who are financially literate from an early age have a personal income three times more than those who aren`t financially sound. A study from UK and US shows more than 60% of adults have debts. Money tops the list of anxiety among most adults. If this doesn`t motivate you as a parent to teach your kids about money, nothing will.
Teach your kids how to make informed financial decisions. As they grow up they should be prepared not only to be debt free but also financially independent.