In a recent post on social media I said:
Parents - please DON'T give your kids a loan, e.g. "I'll buy this for you now but you won't get any pocket money for 3 weeks".
Making them wait teaches them to save. We live in a world where so many people are in debt as they want things right now. We need to make sure our kids don't fall into the same trap.
I stand by this statement as the ability of kids to delay their gratification is paramount in terms of their future financial wellbeing.
However, some readers disagreed with this statement as felt it missed the opportunity to teach kids about debt. Therefore, I thought I’d share my thoughts on this view in this blog.
The other side of the argument
Debt is everywhere these days. It is also easier to borrow money than it has been in the past, with many shops offering ‘buy now, pay later’ options. Therefore, we need to make sure that our kids understand about debt before they learn the hard way.
One way is to talk to them directly about debt. This way they can understand what debt is and the potential dangers. I’ve written a couple of blogs on this topic to help parents. You can find these blogs here and here.
Whilst talking to them about debt will help, actual life experience could be much more powerful. Therefore, the argument is that parents should lend their kids some money so they learn about debt in a safe and controlled environment rather than in the real world where the consequences could be a lot more painful.
I note that as a kid, I wasn’t much of a saver (sadly). I would therefore borrow money from my parents. I did learn a lot of lessons as a result of this.
One lesson I remember vividly was when I was about 15 years old. I borrowed £5 from my parents to buy a new computer game. I had a part-time job so the next week my parents knew I could afford to pay them back and asked for the money I had borrowed. I really didn’t want to give that money back. I tried to convince them that they didn’t need it as they had a lot more money than I did. I still remember to this day my Dad saying “Fine, you don’t have to pay it back!”. Whilst I understood his words, I also understood his tone. It was clear that if I didn’t pay it back then he would never lend me money again. I gave the money back to him straight away and never tried to get away without paying back what I had borrowed.
This lesson worked on me but it required my parents to stay strong and not give into simply gifting me that money. I learnt I needed to be trustworthy. I also learnt that buying now and paying later just meant I’d have less flexibility to do what I wanted later as ultimately I had to give the money back to my parents.
SUPER IMPORTANT POINT FOR PARENTS - if you say you are lending your kids money, you have to get that money back from them. You’ll be doing more harm than good if you say you’ll lend it and then give in to their requests not to pay it back.
So, am I now saying parents should lend their kids money?
Sort of, but only after they have learnt to save.
If kids learn to save then they may never need to borrow (apart from a mortgage), i.e. better they grow up avoiding consumer debt than to just manage it better. That would be a great scenario! Especially given debt is hurting so many adults today as they never learned to save when they were younger. So, I maintain I strongly recommend that parents initially focus on helping their kids save up for the things they want. They need to develop the ability to delay their gratification.
That being said, as kids do get older then I do believe there are some merits to helping kids learn how to manage debt in a safe environment. As mentioned above, I learnt a valuable lesson about debt when my parents lent me money. My kids are likely to borrow to buy their first house or if they wanted to start their own business (good debt), so the more they learn as kids, the more likely they are to avoid the dangers of debt.
I would therefore say that if your kids are older (12 and over or demonstrate a certain level of maturity), and, importantly, have shown they can delay their gratification, then do offer to lend them money to buy something they really want. Just make sure they have the ability to pay it back in a reasonable time frame.
If you do lend your kids money, here are a few rules I suggest you follow:
Continue to give them their pocket money and get them to physically give you the money back. Don’t simply withhold the money. The act of them handing back the money is an important part of how they feel about debt.
Make sure they do repay the loan (don’t go easy on them).
Add some interest to the amount they borrowed. It doesn’t have to be much but it’s critical that they learn that when you borrow money it costs more.
I have no doubt that sticking to these points will be hard as your kids will be sad or angry with having to pay back this money. You have to stick to the rules or you really are going to be doing more harm than good, i.e. they are more likely to use debt more frequently and learn the downsides in the harsh real world.
Lending for business
One other reason I believe that lending to kids can have a positive impact is when kids want to start their own mini-business.
As I’ve written about before, kids are very rarely taught that when they are older they can start their own business, as opposed to just getting a routine job and working for someone else. In a lot of cases, most kids won’t want to start their own business but I believe all kids should be told about the opportunity.
Therefore, I recommend that all parents talk to their kids about starting their own mini-business to see if they like it. You might find out that they have a real talent for it. My older neighbour’s son did (and he was under 12!). Harry was just starting secondary school when he set up a lemonade stand. He then went on to buy and sell drones to his friends before buying a candy floss machine.
To start his lemonade stand, he needed lemons! His parents were happy to help out and they lent him the money to get the lemons and other supplies he needed. After his first day of trading, he paid his parents back the money. He then used the rest of the money he had earned to buy more lemons. Similarly, when he wanted to sell drones to his friends, he borrowed money from his parents and repaid them when he sold for a nice profit. You can read more about the inspiring Harry here.
See if your kids have a good idea and if you feel it could make money, help them out with a loan. As mentioned above, you have to stick rules about them repaying the loan. A key lesson with any business is to make sure you repay what you owe and don’t just keep all the profits to yourself.
The most important lesson your kids need to learn is to delay their gratification. Therefore, when your kids are young don’t offer to lend them money and withhold future pocket money. Get them to save up for what they want. Whilst it might be painful (as we know, kids can nag), it is essential that they learn this skill.
Only once they have shown they can (and do) save, should you consider lending them money with the purpose of them learning about debt, not just to make your life easier :-)
If you do lend then you have to stick to the rules:
They have to physically hand back the money you lent.
They have to repay it all.
Interest should be added to the amount borrowed.
Also, encourage your kids to think of a mini-business and, if it sounds good, lend them some money to pursue this interest. Again, making sure they pay this money back.
Thank you for reading!