Hey there, 40-something parents! Yes, we're looking at you Gen Xers, Xennials, and Millennials. Talking to our kids about money can feel like walking through a minefield, especially when it comes to debt. Many of us grew up with questionable money habits—or, let’s be honest, we didn’t learn much about money at all. It’s time to break that cycle and give our kids a solid understanding of debt. Here’s how to explain it in a way that’s clear, practical, and hopefully a little less intimidating.
1. Start with the Basics of Money
Before diving into debt, make sure your kids have a basic understanding of money. Explain that money is used to buy things, save for the future, and sometimes invest. Keep it simple: “Money is something we use to buy things we need or want. We get money from working, and we can choose to save it for later or spend it now.”
This foundational knowledge is crucial. If they understand how money works in general, it’ll be easier to discuss more complex topics like debt.
2. Define Debt Clearly
Once they grasp the basics, explain what debt is. Debt happens when you borrow money and agree to pay it back later, often with some extra called interest. Use examples they can relate to:
“Let’s say you want to buy a new video game, but you don’t have enough money right now. If you borrow the money from me to get it, you’ll need to pay me back later. That borrowed money is called debt. When people borrow money from banks or credit cards, they have to pay it back too, usually with a little extra money added, which is called interest.”
By breaking it down this way, they can see how borrowing and repaying money works in a straightforward manner.
3. Talk About Good vs. Bad Debt
It’s important to differentiate between good and bad debt. Not all debt is harmful, but it’s crucial to understand the differences.
Good Debt: This is debt that can help you build your future. For example, taking out a mortgage to buy a house or student loans for education are considered good debts because they can lead to long-term benefits.
Bad Debt: This type of debt doesn’t help you build a better future and often comes from things that lose value quickly or aren’t necessary. Credit card debt from buying things you can’t afford falls into this category.
You might say, “Some debt can be helpful, like a loan to buy a house or pay for school because it helps you in the long run. But debt from buying things you don’t need or can’t afford, like expensive gadgets, can be a problem because it doesn’t help you in the long run and can be hard to pay off.”
4. Explain Interest and Repayment
Help your kids understand how interest works and why it makes debt more expensive. Interest is the extra amount you pay back on top of the borrowed money. This is why it’s important to be careful with borrowing.
“Let’s say you borrow $10 to buy a toy, and I ask for $12 back. That extra $2 is called interest. It’s like paying a little more for borrowing the money. The more money you borrow, or the longer you take to pay it back, the more interest you might have to pay.”
This will help them grasp why borrowing money can end up costing more than the original amount borrowed.
5. Share Your Own Money Experiences
Be honest with your kids about your own financial experiences. If you learned bad money habits from your parents or didn’t receive much financial education, share that with them. “It’s important to know that I didn’t always understand money when I was younger, and I learned some things the hard way. I didn’t always make the best choices with borrowing money or saving, but I want to help you understand these things better so you can make smarter decisions.”
Sharing your personal experiences not only makes the conversation more relatable but also shows that learning about money is an ongoing process.
6. Teach the Importance of Budgeting and Saving
One of the best ways to manage debt is to avoid it in the first place. Teach your kids about budgeting and saving money. Help them create a simple budget and set savings goals.
“Creating a budget means planning how you’ll use your money. You decide how much you want to save, how much to spend, and how much to keep for later. It’s like making a plan for your money so you don’t run out of it and avoid borrowing more than you can pay back.”
Setting up a savings jar or account can be a practical way to show them how saving works. It helps them understand that having money saved up can reduce the need to borrow.
7. Discuss the Consequences of Uncontrolled Debt
It’s also important to talk about the potential consequences of not managing debt properly. Explain that excessive debt can lead to financial problems and stress.
“If you borrow too much money and can’t pay it back, it can cause problems. You might have to pay more money in interest or have trouble getting more loans in the future. Managing debt carefully helps you avoid these issues.”
By explaining the potential downsides, you can help them see why it’s important to be cautious with borrowing.
TL;DR (AKA Summary)
Talking to your kids about debt doesn’t have to be overwhelming. By starting with the basics, explaining good vs. bad debt, and sharing your personal experiences, you can provide them with a solid understanding of how debt works. Teach them about budgeting and saving, and discuss the potential consequences of mismanaging debt. With these conversations, you’ll help your kids develop healthy money habits and prepare them for a financially savvy future.
So, go ahead—take a deep breath, have that chat, and give your kids the financial wisdom they need to navigate the world of money and debt. Your future self (and your kids) will thank you!
References:
National Endowment for Financial Education: Teaching Kids About Money
Investopedia: The Basics of Debt and Interest
Consumer Financial Protection Bureau: Kids and Money
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