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How To Teach Your Children About Debt

Updated on November 27, 2010

When most parents teach their children about money it is about saving, giving, getting the best deal and spending. While these are all great things to teach kids, they also need to learn all about debt. Not just to avoid it (which is the ideal of course) but also to figure out how borrowing money works, how it effects a person's life and budget, and the difference between good debt and bad debt. I am not an expert, but I will share with you how we handle borrowing money and debt at our house.

First of all they have to be old enough to understand the concept. Once they hit school age they can grasp more of how money works. At this time I will loan them money, momentarily, to buy a want at the store. They must have money at home for me to loan them money. As soon as we get home I make sure they pay me back. They start learning the concept of getting what they want without paying for it right away, but paying for it later.

Once that is done periodically and they have a good grasp of paying someone back when they borrow then I will start letting them borrow money to buy something even if they don't have the money to pay me back at home. We typically discuss in the store or beforehand how they will pay me back. Things to consider are how much the item costs, what the item is, how much money they currently have towards the item, and when they will get the money to pay you back. Will they get an allowance in a couple of days and can pay you then or do they need to do chores to earn the money over the next week or so? Make them figure out ahead of time how they plan to repay the debt.

By the time a child is ten years old or so they should be able to understand more of how debt works. Explain to them the concept of interest and regular payments. Use real life examples of how debt and the repayment process works. At this point if a child wants to borrow money from me but doesn't have money to pay me back at home, then I will let them borrow money (most of the time) but they have to pay me interest. We usually make the interest 10% of what they are borrowing. This is enough that they rethink sometimes if they really want to borrow money.

You can create debt repayment plans to meet your needs. A child can either work off the debt on a regular basis such as one chore per day or be required to do a certain number of chores by a certain time period. It depends on the age really. My younger ones will just do one chore a day. My older ones will be required to do a set amount by a certain day. Then they have to budget their time and make sure they get it all in.

What do you do if your child does not repay you in money or chores by the deadline? Well, now is the time to teach them about repossession. I take the item they bought if I can, although sometimes they borrow money for edible items or gifts for other people and then that is not an option. If I repossess an item they will get it back when they finally pay me for it, plus interest, if applicable. If I can't repossess it, then they have to pay me more money than originally called for, such as another 10% for being past due or doing an extra chore for being late with their payment.

I don't loan money to my kids every day. Sometimes not even every week. This process I have talked about here is years long. We have been working on this for at least six years and we still have a long way to go. I do not loan money for everything. I have a child who wants to spend every penny he ever has and then some. He has to have a solid plan in place before I will let him borrow money and it has to be on something worthwhile. When we were at the store last week and he desperately wanted more football cards I would not let him borrow money. I told him that purchasing something so frivolous and unneeded was not worth going into debt for. Yes he was upset, but later on the way home he said he was glad I hadn't loaned him the money. I think he gets tired of never having any money.

This might sound like a harsh plan, but what better time to teach someone than when the stakes are low. Would you rather your child go into a little bit of debt with you now or a lot of debt with the credit card company later? Would you rather repossess (temporarily) a favorite toy or have the car company repossess their car? The earlier a person can learn a lesson (this goes for anyone) the longer they can use that information to better their life. I really wish I had learned these life lessons when I was a kid.  Hopefully by working through this process while they are still living under my roof will prevent them from making stupid mistakes when they are older. 


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    • profile image

      Bill 7 years ago

      It's never too early to learn about money, investing, and debt.

    • Hello, hello, profile image

      Hello, hello, 7 years ago from London, UK

      Very good idea and thank you for sharing.

    • justmakingmoney profile image

      justmakingmoney 7 years ago from The Pearl of the Orient

      Thanks Jennifer, this hub has reinforced what I exactly do to my kids who are now 13, 9 and 2y/o - about money and good stewardship in general. This also reminds me of how I was raised up by my parents, they trained me to be independent and manage my own life and resources by myself - they sent me to high school that was in a different town far from my hometown and they rented a small house for me where I was trained to live alone and did the cooking, the washing, the cleaning and everything by myself, and managing my weekly allowance too. This is very unusual for middle class families here in the Philippines, a beautiful place where I was born and raised. I survived that "training" and actually graduated in high school as Salutatorian with several citations. Though I didn't totally like the idea before but looking back I am very thankful because it has definitely made me a better person. Thanks again for this hub, hope many will be able to read it.

    • Shane Belceto profile image

      Shane Belceto 7 years ago from WA USA

      Great time in life to learn yes I agree and also agree on wish I too would of learned as a kid .. at leaste we learned at some point huh lol

      ~Expect Miracles

    • Mokibobolink profile image

      Mokibobolink 7 years ago from Southern California

      Great hub and all stuff I wish I'd been taught as a kid, too.

    • Jeremey profile image

      Jeremey 7 years ago from Arizona

      Good tips here for sure. I wish my parents had used a couple of these idea's with me!

    • tmbridgeland profile image

      tmbridgeland 7 years ago from Small Town, Illinois

      I am not so systematic. This is well-thought-out.

    • Kenneth Ray profile image

      Ken McGonigal 7 years ago from Maple Ridge, BC

      I like the concept here. This would work well with teens. I had to learn about money the hard way. I racked up credit cards until I ran out month at the end of the money. I have five kids. I usually take privileges away and just recently my daughters cell phone which she owes me money for. Thanks for the hub. :)

    • Aya Katz profile image

      Aya Katz 7 years ago from The Ozarks

      Jennifer, this is a good policy you've outlined here.