The other day I was trying to think of a good way to teach my two girls about debt. Mostly to see what kind of reaction I would get given they are still young. You might ask why I would want or need to talk to my kids about debt when they are still young? My view is that if we teach our kids now, we can ensure that they form a long-lasting impression of the pitfalls of taking out credit which will stick with them into adulthood. If we do this, then as soon as they become old enough to have their own, they will hopefully not just see credit cards as “free money” and for “free sign up gifts”. Credit cards are likely to be the first form of debt our kids will be exposed to when they grow up so I used credit cards to explain debt. In this blog I’ll go through how I talked about credit cards with my kids and the questions they asked. First thing - I reminded them of one of the key objectives of money I first gave them a recap of how money is like a seed and if planted it can grow. This is something they are familiar with as we show them their savings each month in terms of how many Blue Trees they have and they put away some of their weekly pocket money to grow more Blue Trees. They know that if they keep saving they will soon have a Blue Tree forest which will produce more seeds and therefore more Blue Trees. This visualisation seems to work really well, especially as kids are becoming so passionate about trees, as they learn more about deforestation at school.
Using credit cards means you are planting deadly Red Trees I explained that adults can buy something they want or need using their money (their Blue Tree seeds) or they can use a credit card. A credit card means that a company buys the thing you were buying for you and so you now owe them a Red Tree. A Red Tree starts off as a seed and is worth as much as a Blue Tree seed. Question from my daughter: Why don’t adults just pay using their own money? I then went through the reason I have a credit card:
It allows me to buy all the things I want in a month and then just pay off the balance at one point in time.
A credit card can sometimes help if there is a problem with the thing I bought as it often comes with insurance (which I said I’ll explain another time).
If I show that I’m good at paying back what I owe to the credit card company, then it helps when I want to buy bigger things in the future, like a house.
It can help in an emergency when you need to pay for something and you don’t have enough money (seeds) at that very moment.
Most importantly, if we use our credit card we get ‘free flights’ after a period of time!
These were the positive reasons. I then explained that there is a ‘dark side’ to credit cards. If people don’t pay back all that is owed to the credit card company within 30 days, the Red Tree seeds begin to grow. And grow quickly! Red Trees grow much faster than Blue Trees. The longer you leave the Red Trees, the bigger they grow and harder they are to get rid of. People try to cut down the Red Tree forest in small bits at a time but the Red Trees continue to grow. In the end, people can end up spending all their time and money just trying to get rid of the Red Trees rather than planting and growing their own Blue Tree forest.
Question from my daughter: Why do people not pay the credit card company in 30 days then? I then explained that some people want to buy something but don’t have all the money yet and are not likely to have it in 30 days, i.e. they don’t have any Blue Trees. Unfortunately we live in a world of instant gratification. People want the things other people have and they want them now. Credit cards means they can do this as they can buy what they want now and pay for it later as they think they’ll have the money in the future. The issue is that a lot of these people don’t really see that using a credit card means a Red Tree is growing and they don’t understand how fast the Red Trees can grow. This means they end up paying a lot more for the thing they bought than if they had saved up and bought it later with their own money.
Key message for kids Growing a Blue Tree forest is the goal. The more Blue Trees you have, the better. For our kids, we get them to save at least 10% of all the money they receive for the long-term (i.e. plant Blue Trees) - this is one of the three essential money habits to teach your kids. Using a credit card can be good as long as you don’t let the Red Trees grow. Make sure your kids understand that using credit cards can mean that you can be working to chop down trees (Red Trees) rather than planting trees (Blue Trees). One way to make sure your kids avoid spending too much on credit cards is to make sure they understand the Real Wealth Formula and to delay their gratification. To learn more about this then read our article on How to teach your kids about: the Wealth Formula. Helping your kids grow their own Blue Tree forest To help your kids grow their own Blue Tree forest, consider giving them pocket money [LINK], no matter how small the amount, and then get them to save at least 10% of this for the long-term. You can then help them invest this money so it grows over time. To learn how to invest simply, read our blog ‘What is investing?’. We have a tool which allows you to save for your kids using your own investment account and to show them their share as Blue Trees. The tool is the Blue Tree Sharing Tool. For more information visit www.bluetreesavings.com. You can also help your kids learn about investing by reading this blog: How to teach your kids about: the Stock Market
Thanks for reading!
Recommended book: Save Your Acorns by Robert Gardner