Teaching Kids About Debt

When I was young, my mother would loan me a few dollars here and there to buy a toy. It was agreed that I would pay her back when I raided my piggy bank upon arriving home. I always thought she was simply being nice by loaning me the money; I never realized that she was also teaching me a valuable lesson about the world of finance.

Now, looking back, I know that the simple introduction to lending became invaluable as I entered the adult world of personal finance. I learned from my mother's teaching tactic that money loaned is always expected to be paid back.

As I move forward raising my own children, I'll rely upon Mom's tactics to teach my own children about debt. Here's what and how she taught me, and how I'll teach my daughter.

Simple Introductions

In the young years, my mother relied upon simple introductions to loans and debts. Like in the loaning example above, Mom used a "show don't tell" approach to introduce my siblings and me to the basics of loans. Here are a few other tactics she used:

  • Bringing Children to Loan Closings/Deals: Mom always believed that children learn through real-life experiences, so whenever she took out a loan, she didn't hide it from us. Of course, these were few and far between, but we got to witness her car purchase and a personal loan, both of which she explained that she must pay the bank back.
  • Allow Children to Witness Family Loans: My mother never hid the fact that money is a part of life. When things were tight, she would sometimes borrow money from my grandparents. We saw the exchanges; both the borrowing and the repayment were never done in secret.

Getting into Detail

As we aged, it became obvious that we needed to learn the finer points in lending. Whereas loans from Mom were really cheap (read: interest free), we needed to learn that banks and credit cards weren't as generous. To teach us about interest, credit and bank loans, Mom sat us down for the following discussions:

  • How Credit Cards Work: During her college years, my mother had a few credit cards that helped her get by. Once she entered the full-time workforce, she began to pay them off with a vengeance, and she never kept her repayments a secret. Instead, she shared with us kids the exact details behind how credit cards work.
  • Introducing Kids to Interest: One of the finer points of personal finance that my mom detailed in my early teens was how interest worked in repayment. I was familiar with interest in savings, so she simply reversed the thought process to show me how we pay the bank money to loan us cash.
  • Co-Signing on a Bank Loan: Once I was old enough to drive, Mom told me she would co-sign on a small bank loan for a car. I was in charge of setting everything up; she would show up at the closing. This experience was invaluable to me because I learned how to conduct myself in a financial situation (even if I was a blubbering fool when I asked for the loan).

Teaching kids about loans isn't really all that difficult. It can be as simple as allowing them to bear witness to adult transactions, like loan closings; kids can pick up the basics easily and apply them to their own lives with a little help as they get older.

How about you? How were you introduced to the world of lending? How will you introduce your own kids to loans, debts and credit?

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Anonymous's picture

AverageJoe wrote:

Thu, 08/30/2012 - 13:47 Comment #: 1

My parents were the opposite: we didn't talk about it. Because of that, I was oblivious to the entire process and racked up TONS of debt in college.

We played the electric bill game with our kids, among others (but that was a favorite). We'd chart how big our electric bill was every month. The kids got fired up about seeing if they could save money over the last bill. Talk about a game where everyone won!

Christa Palm's picture

Christa Palm wrote:

Mon, 09/03/2012 - 17:32 Comment #: 2

Average Joe, I believe a lot of parents back then assumed finance was taught in school and never talked about money in the home.

It's great to hear about the electric bill game you played with your own kids -- I might have to steal that excellent idea!

Anonymous's picture

Marie at Family Moneyvalues wrote:

Mon, 09/03/2012 - 20:41 Comment #: 3

I recently started teaching the grandkids about interest. Here is what I wrote up on that: http://blog.familymoneyvalues.com/2012/08/making-compound-interest-real-...

Christa Palm's picture

Christa Palm wrote:

Fri, 09/07/2012 - 20:08 Comment #: 4

Thanks for the link, Marie -- great article!

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