If you want your kids to have a healthy financial future, then it’s important that they learn to make good decisions regarding money while they’re still young. By teaching your children about debt from a young age, they’ll learn to understand how to use good debt to better their futures instead of being caught in the downward spiral of bad debt.
Good Debt vs. Bad Debt
Even though it might be possible to go through life debt-free, many times it’s more convenient to take out a loan to pay for the things we need that cost a significant amount of money at once. When taking out a loan, however, it’s important to keep in mind whether the debt we’ll be taking on is good or bad debt.
Good debt helps you generate income in the long run. Even though you have to take out a loan, good debt is more of an investment in your future. Examples of this are a home loan, as your house will increase in value over time, or a business loan that will help to increase your revenue. Even auto loans can be good debt if you use them to help make you money, like driving to work or for business purposes.
Bad debt is used to purchase items that lose value quickly and don’t generate a return as well as debt that has a high interest rate, such as credit card debt.
Stay Away from Payday Loans
It’s equally important for kids to learn to steer clear of predatory lending practices like payday loans. Payday loans have skyrocketing interest rates and can make their financial situation worse. If a borrower can’t pay the full amount by his or her next paycheck, then he or she is charged even more fees to “rollover” the loan to his or her next pay period, and payment periods are very short for these loans. Many people get stuck in an endless and draining cycle of debt due to these unethical lenders.
It’s also important for young spenders to realize that borrowing money comes at a price. Many kids think that loans are for a set amount, and once they’ve paid that back the loan is over, without realizing that by borrowing money they’re agreeing to pay back more than they planned.
Living Within Their Means
With so much of today’s advertisement aimed at children, it’s important for them to learn that they don’t need to own everything they see on TV. Spending and saving are habits that start in youth, so make sure you teach your children to spend their money wisely and save up for large purchases that actually matter.
Although there’s no single right way to teach your kids to be smart with their money, these few tips provide a good place to start an important conversation about saving and spending. By helping your children understand these basic principles about financial health, you’ll be ensuring that they grow up with the right foundation for a bright future.