How to Teach Children About Debt

As a parent, you’ve probably been in this situation before, or can find it easy to imagine: You’re at the store when you walk by that one expensive item your child insists they must have.

“Can we get it, pleeease!?”

You’re distracted, working your way through a shopping list, and absentmindedly say, “No, we don’t have the money for that.”

But you’ve got a clever problem-solver on your hands.

“Just use your card!” your child exclaims.

If it were only that easy, right?

While we can all hope that our children know better by the time they’re adults, we must remember that it’s up to us to teach our children about responsible credit use, the pitfalls of living outside our means and everything else that comes with modern financial literacy.

But don’t worry yet, here are six incredibly useful tips to help you get started:

1. Have age-appropriate conversations

It’s never too early to start talking about money and debt. In fact, teaching valuable financial lessons during your child’s formative years can make a big difference later. These early concepts will help build a solid foundation children can build on as they get older.

As an example, you could compare credit scores to grades. Children know that better grades offer more benefits, such as the ability to participate in extra-curricular activities and acceptance to better colleges. Explain credit scores in a similar way: Making smart purchasing decisions and paying off debts quickly can lead to a better credit score, which has benefits when it comes time to get a car loan or buy a house.

If your child is student-age, we have an entire page on our website with financial literacy tips and information geared towards them.

2. Look for teachable moments

“Just use your card” could be a teachable moment for a child, especially since they might not even realize that there is more than one type of card. You can start by teaching them the different ways to pay:

• Cash: Physical dollars and coins you can hold in your hand. When you spend cash, you know exactly how much you have and what you have left after you make your purchase.
• Check: A written document that tells your bank to take money you have in your checking account and give it to the person named on the check. It’s important to keep track of how much money you have in your checking account so you don’t spend more than you have and potentially overdraft your account.
• Debit card: A plastic card with a magnetic strip or, more recently, a digital chip that can be used to make purchases at most retailers. When you spend money on a debit card, the money is taken out of your checking account immediately. Like using a check, it’s important to keep track of how much money you have in your account so you don’t potentially overdraft.
• Credit card: This is also a card that can be used to make purchases, but this money is borrowed and does not come out of your bank account. When you borrow money on a credit card and don’t pay it in full within your statement cycle (typically one month), you must pay back extra money to the card provider, called interest.

3. Talk about the dangers of FOMO

In the age of social media, fear of missing out or trying to keep up with the Joneses is more common than ever. Watching an influencer take an extravagant vacation or a friend purchase the newest gaming console on the market can lead to self-esteem issues and impulsive spending.

It’s important to teach lessons on the value of frugality and living within your means. All it takes is a quick Google search to see a plethora of quotes from millionaires about how they became wealthy from hard work, but stay wealthy by not buying the newest car off the lot or the most expensive designer clothes.

4. Make it real

If your child has been asking for the latest iPhone or a Stanley cup in every color, use our credit card payment calculator to show them the true cost of an item in various scenarios, such as if only the minimum monthly payment is made.

You can also put prices in terms of hours of work. As an example, say they get paid $10 a week for allowance. That video game they have been begging for is $40. Rather than just say no or purchase it for them, explain that the game is equivalent to four whole weeks of work! This can help them discern how much they really want something and also have an appreciation for the cost when they do commit to a purchase or receive an expensive gift.

5. Make a plan for large purchases

Use our Money & More article about getting kids interested in savings to help teach your child to save for large purchases and emergencies later in life. If you have a savings goal for yourself or your family, be open about how you are working toward reaching that goal - be honest about the sacrifices being made to save money with purpose.

As an example, “Your current phone works just fine, so we are not going to purchase a new iPhone because we are saving for our family vacation this summer” might go over better than simply saying no to the latest and greatest.

6. Lead by example

Out of all the tips, this is one of the most impactful.

Though we don’t inherit financial habits as we would eye or hair color, they are often passed along to children with almost as much certainty. Model responsible credit use, prioritize saving and encourage open communication about money management. Explain why you make certain purchasing decisions and how those decisions will impact your overall financial well-being.

By starting early and keeping your child engaged, you will set them up for financial success!

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.