Would you let your child take on 40,000 dollars in debt?

Article at a Glance

  • Teens have opportunities to make huge financial choices.
  • Financial lessons are easiest to teach when lessons are cheap.
  • Separating allowance from chores lets you focus on teaching financial literacy.

The reality is that before the ink dries on your teen’s high school diploma, they’ll be given opportunities to make huge financial choices without your input.

In 2016, the average U.S. college student graduated with nearly $40,000 in debt, largely from student loans they began as teens. What’s more, campuses nationwide have come under scrutiny for aggressively marketing loans and credit cards to students.

“Kids need a small, steady stream of money to experience success and failure while the lessons are still cheap”

With so much of their future financial security and happiness on the line, it’s more important than ever to begin teaching kids how to handle money from an early age. But how do you begin?

First, you need a tool.

Allowance as an Educational Tool

There are two common criticisms of allowance. Some feel it’s a bad idea to pay children for chores because they will then expect to be paid for every task. Others argue that paying children for nothing sends a poor message about work ethic. But a third view held by some financial experts is that we should separate allowance from the concept of work ethic. They argue that kids need a small, steady stream of money to experience success and failure while the lessons are still cheap.

More importantly, kids need control of some money to facilitate conversations about decision making, prioritizing, and saving, and to help them learn critical thinking skills. To address the two criticisms above, chores can be tied to other privileges, like screen time.

Teaching Moments Made Possible by Allowance

1. Separating Wants and Needs

Financial experts like Ron Lieber advise parents to set allowances slightly lower than what kids need to satisfy their usual wants. This deficit will force them to prioritize their spending and plan ahead. There may be tears along the way but missing out on a movie with friends because they spent their money on a third fidget spinner is a lesson no amount of lecturing could have taught.

For older kids, consider setting allowances slightly higher but put the responsibility on them to cover one of their needs. For pre-teens, this can be good practice for the car insurance and cell phone bills they may be expected to pay in a few short years.
If their wants outpace their allowance, this is an opportunity to allow them take on additional jobs for pay.

Wider conversation: When children ask about eating out or getting a new pet, don’t stop the conversation with, “we can’t afford it.” Instead, you can explain that those are wants that fall behind the family’s current needs, like new tires or paying a medical bill. Talk about a time you or a relative took a part time job to reach a financial goal.

2. Hours of Fun per Dollar

When kids are spending their own money on toys, they often become more selective. A helpful conversation to have in the toy aisle is the concept of “hours of fun, per dollar.” Using past examples, you can walk your child through some of their possessions and determine the “fun factor” of price divided by hours of enjoyment. In this equation, things like board games, Legos, and even bicycles can pack much more value than the latest battery-operated gadget.

Wider conversation: When discussing what your family should do for your next outing or vacation, talk about which activities pack the most value in the “Value=Dollars/Hours of Fun” equation.

3. Saving for Big Purchases

The process of setting and meeting savings goals provides lessons that extend well beyond finance, so many experts even recommend that you help subsidize initial savings goals so kids can have an early win. This could mean paying your children interest on their savings or agreeing on a matching program for a predetermined savings goal.

Even without a specific goal, routine savings is a lesson you can teach by having kids set aside a portion of their allowance each week.

Wider conversation: Be open (in an age appropriate way) with kids about your own savings goals and what you’re currently sacrificing to meet them. Saying, “not this month, we’re saving for a trip” teaches more than saying, “we can’t afford it.” Likewise, sharing that you’re dipping into your rainy day account for car repairs is a good way to model successful savings.

“We could never interest our son in saving money until we set a savings goal and matching plan with his little sister. Seeing his five-year-old sister meet her goal and bring home a shiny new scooter tripped some wire in him. Within a day, he wanted to map out a plan to save for his own motorcycle.”

4. Giving from the Heart

Your family may give to local charities or to your church but your child is unlikely to experience the same lessons and feelings from giving by association as they would from giving their own money. Talk with your child about causes that speak to them and how they would like to help. Set a giving goal and help your child make the donation in person to maximize the emotional impact of the moment.

Wider conversation: Talk with your children about which causes you support and why, on a level that’s appropriate for their age. It isn’t necessary to explain how many dollars you give but it can be useful to explain what percentage of your income you dedicate to giving.

5. Buyer’s Remorse

Making a regrettable purchase now and then is a part of consumer life. When kids buy something they quickly lose interest in, it can be useful to examine the purchase without blame or shame.

Here are some questions to start the conversation.

  1. What enticed you to make the purchase?
  2. Did the advertising make promises the item didn’t deliver?
  3. Was your choice influenced by peers or wanting to keep up with them?
  4. Do you think you acted too quickly?
  5. How did the purchase stack up in the hours of fun per dollar equation?
  6. What would you do differently next time?

Wider conversation: Be open about your own mistakes. Statements like “I really should have read the reviews on this before buying it,” or, “Maybe I’ll borrow one from Aunt Jane before I buy my own” illustrate ways we can both learn and protect ourselves from buyer’s remorse.

6. Using Money to Express Values

While you cannot force your children to adopt your values, you can help them develop their own. Spending is one way people express their values. Help your child define a couple things they feel are important, like saving resources or not supporting companies that use child labor. Discuss ways they can make purchases that support their values.

Wider conversation: Explain how you choose to “vote with dollars.” Talking about why you choose to spend more for organic produce or locally made goods helps kids grasp the values-based decisions that money affords you.

7. Experience with Debt

The idea of charging children interest may seem repugnant but some financial educators say it’s an important lesson that’s best to learn when consequences are low. Lending your kids money for a big purchase and then charging them interest as they repay it gives you the opportunity to talk about the cost of debt and the feelings that come with your money being tied into a payment plan. Debt can also be an effective teaching tool when a child makes a bad choice with expensive consequences—like breaking a neighbor’s window.

Wider conversation: For older kids, big purchases (cars and homes) are a good opportunity to get their help calculating the cost of borrowing. You can have a productive discussion about cost-lowering options like making a large down payment, maintaining a high credit score, or simply paying cash. Finally, no debt discussion is complete without approaching the concept of risk vs. reward. When do you believe it’s worth the risk to acquire debt? What types of purchases should never be financed?

It’s normal for parents to feel defensive when children ask certain money questions but it’s important to keep the dialogue open. Financial writers like Lieber suggest that instead of deflecting awkward questions like “how much money do you make?” you should keep calm and ask your kids why they are curious. There’s often an underlying question that will be easier to address in an age appropriate way. Young children may just want to know there’s enough money for the family’s needs while older kids may be curious how your family income stacks up to a statistic they read.

In both cases, there is an opportunity for productive conversation that helps teach financial literacy. And the sooner you can begin having open conversations with your children about money, the sooner they can begin gaining experience using it as a tool—experience that will be crucial when they step onto campus.

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