This topic is super important for those families with slightly older kids. 'Buy Now, Pay Later' has recently become very popular in many countries and is causing a lot more people to use debt.
Let me first explain what Buy Now, Pay Later is.
What is Buy Now, Pay Later?
As the name suggests, it’s a form of a loan. When you go to pay for something in a store or online, retailers may offer you the option of being able to spread the payment over 3 or 4 instalments over a couple of months. In many cases, there will be no interest to pay, and it is super quick and easy to sign up.
Doesn’t this sound great?! You can buy what you want over a period of time without paying interest!
There are many Buy Now, Pay Later companies starting up, so you can spread your payments for nearly everything now.
Apple is planning on releasing its own version of Buy Now, Pay Later so that more people can buy their products over time rather than forking out one big amount at once.
Teaching kids about Buy Now, Pay Later
Even though my daughters are only 7 and 10, I have spoken to them about this topic already. Like many other money topics, I believe that if they learn about this now, it will help them in the future, even if they don’t use this knowledge for many years.
I started by giving them a simple example using some numbers. The actual example I used was just a pair of jeans, which cost $24. I said that people get the choice to pay $24 now or $8 in 3 instalments over 2 months, In both cases, they only pay $24 for the jeans. I asked them:
"Would you rather pay $24 now or $8 in 3 instalments?”
My daughters were sceptical, as I’ve spoken with them about debt and credit cards before (you should read How to teach kids about Credit Cards). They both decided to pay the full $24 but couldn’t clearly see the problem with the $8 in 3 instalments as there was no interest to pay.
They initially thought it was a ‘Scammy Sam’ which is a character I made up to help teach them about scams. Again, you can read more about that here - I’ll add these links to the end of this blog for ease.
I told them it wasn’t a ‘Scammy Sam’ but before I explained I asked them:
“If the Buy Now Pay Later company doesn’t make money from charging people interest on the money they have borrowed, how does it make money?”
This is a tough question, especially for a 7 and 10-year-old, as not many people know the answer. A lot of people believe they make money from late fees. Whilst they do charge late fees, that’s not the main source of their revenue.
How do Buy Now, Pay Later companies make money?
Buy Now, Pay Later companies actually get paid by the shops (physical and online) where you buy things from. If you buy something from a store and use Buy Now, Pay Later, the store will give the Buy Now, Pay Later company around 5% of the sale price. So the more people spend, the more money they make.
For the pair of $24 jeans mentioned above, if my daughters had decided to use Buy Now, Pay Later, the shop would have had to pay the Buy Now, Pay Later company around $1.20 (5% of $24).
So why would a store want to offer Buy Now, Pay Later if they have to give away 5% of the money from the sale?
Stores know, from extensive research, that people are much more likely to buy something if they can pay in instalments rather than a lump sum.
If something costs $100 - it might feel expensive - but $25 every couple of weeks feels much more manageable. Therefore, people are much more likely to buy something if they can pay in small amounts. It’s the same reason Netflix charges around $10 per month rather than $120 per year. We like small numbers and are more likely to spend when we see small numbers.
As a result, if stores offer Buy Now, Pay Later, more people are going to buy things from their store, and they’ll make more money.
This shows why stores offer Buy Now, Pay Later. Now let’s look at the downsides of people using this form of payment.
The 3 Downsides of Buy Now, Pay Later
A lot of people will say, “It’s interest-free, which is great. It’s borrowing without the pain”. It’s not very clear on the downsides of people using Buy Now, Pay Later, which is exactly what these companies want (and why so many people use them). We need to look at the longer-term impact of using Buy Now, Pay Later to see the downsides, and this needs to be explained to as many kids as possible.
What are the downsides?
ONE: It’s a trick to encourage impulse spending
Buy Now, Pay Later is designed to reduce the friction at the point of spending so more people spend impulsively. It’s much easier to agree to spend $8 in 3 instalments rather than spend $24 in one go. This is especially true if the store also offers limited-time offers on some goods.
For example, “30% discount if you buy today. If you don’t have the full amount now, no problem! You can use Buy Now, Pay Later, so you don’t miss out on this limited-time deal!”. You can easily imagine how well this works on many people, and they would buy more things than they would have done otherwise.
The simple rule for spending should be: If you can’t afford to spend $24 today, then you shouldn’t be buying things that cost $24.
TWO: It’s still DEBT!!!
Whilst it might be very cheap debt, it’s still debt. Everyone’s goal should be to build up savings over time, not go into debt. As I say to my kids (and a key theme from Grandpa’s Fortune Fables), think of money like seeds. Those who are financially healthy and wealthy are those who plant their seeds and grow a financial forest.
Going into debt, even interest-free debt, probably means you aren’t planting any seeds and not growing your forest. (I appreciate that some people might use Buy Now, Pay Later and still be saving but, sadly, only a small handful of people are using it in that way).
THREE: It could be the start of a debt cycle
If you can’t afford the full amount of an item today but still buy it (using debt), you are living above your means. We really want to avoid kids doing this in the future as it has longer-term negative impacts.
Let’s say in the future your kid buys a designer pair of jeans using Buy Now, Pay Later. They then feel they can’t just have a pair of designer jeans and a cheap T-shirt. So, they go and buy a designer t-shirt using Buy Now, Pay Later too as it’s only a few more dollars each week. Later in life, they can’t be someone who wears designer clothes and drives a banged-up second-hand car, so they borrow money to have a nice car to go with the nice clothes which they can’t afford. The story goes on, and they are constantly using debt to live a life they can’t afford. It is very hard for someone to lower their standards (i.e. how they are seen by others) once they have been set.
Buy Now, Pay Later is cleverly designed to offer something that is convenient and at no extra cost to people using it. This is why it has become so popular in many countries. As parents/guardians, we need to be very proactive in teaching kids about the downsides of Buy Now, Pay Later before they get exposed to it.
The downsides are:
It’s a trick to get us to spend more impulsively: They know, we’re more likely to spend if we can pay in instalments.
It’s still debt: We want our kids to be saving rather than going into debt
It could be the start of a debt cycle: Using debt is living above their means, which is hard to reverse.
If you have older kids, get them to watch our Online Course. Just five 20 minute videos could change their finanical future as they learn about saving, investing, debt and more.
When talking to kids about Buy Now, Pay Later, it’s really important that we get them to remember the 3 Rules of Wealth (Money). This is how they are going to build their wealth over time.
Remember the 3 rules of wealth?
Save 10% of all the money you receive
Invest what you save
Buy Now, Pay Later is working hard to ensure we don’t follow rules 1 and 3. They want us to spend more of our money and spend it now.
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Thanks for reading!
Useful links from this blog:
P.S. If you want to help your kids learn the 3 rules of wealth using fun stories, then make sure you get them a copy of Grandpa’s Fortune Fables.
P.P.S. This blog focuses on using debt for spending. Using debt for mortgages, education or starting a business is different as the debt in these cases is expected to lead to the person having more money in the future.