Debt is a burdensome monster that tends to plague the majority of people. Unfortunately, the misunderstandings of debt are to blame in many cases. Understanding debt and finances is a must for all your children so they can stay on the safe side of debt well into their adult years.
The Hidden Cost Of Interest
Taking out money to pay for items is something that your child already understands. However, interest on that money is a concept that needs to be properly explained. Children should understand both sides of the coin. It's important to explain that the bank wants to make money on the money they give to the borrower. Contrarily, the borrower wants money to make a purchase today and must pay a premium to have that money now.
Buying a car, paying for college, or purchasing a house all require large sums of money. Many people don't have that money on hand so they rely on a lending institution to supply them with the cash now. This means the borrower has to pay the lender a premium, known as the interest rate, in order to gain access to the cash now. When teaching your children about interest on money, use paying for college as an example. If they are going to borrow the money to pay for college then an interest rate will be applied that they have to pay on top of the principal amount they borrowed.
Good Debt Vs. Bad Debt
A major lesson you should teach your children about debt is that there is good debt and bad debt. Simply explained, good debt is those purchases which increase their net worth, such as a home. Bad debt is debt that doesn't increase a person's net worth. This simple explanation can make a world of difference in understanding debt from the perspective of your child. You don't want to scare your children from utilizing debt if it's for good purposes of increasing their net worth. Being responsible for the type of debt they take out is an area that needs to be clarified.
Savings Accounts Over Credit Cards
Credit cards are a touchy subject for many adults as many have had bad experiences with them in the past. Most recommend that their children keep a credit card on hand in case of emergencies. We discourage you from telling your children that. Rather, explain that having a savings account for emergency instances is the ideal option. A savings account allows them access to their own money, at no charge. In addition, the money in their emergency savings account can accrue interest over time.
Only Bite What They Can Chew
When it comes to debt, taking on new debt requires that a person can comfortably afford the monthly debt and interest payments for that debt amount. Teaching your children how to understand what their monthly payments will be and how much of their income it will be is a must. This way they can understand if they're actually able to take on more debt or not at any point in time.
Teaching your children about debt is a must for any parent. It's never a good idea to skip over the topic of finances as a person's finances is a major factor in their happiness throughout life. Always start to teach your children about the topic of debt and give them much-needed insight into how to handle debt so they have the foundational blocks to successfully manage debt in their adult years.