Before I start, I want to note that this blog contains some of my personal views about debt. I don’t mean to cause any offence to anyone who has a different view to mine - I appreciate debt can be a sensitive subject.
63% of adults in the UK have debt (excluding mortgages)
Money is the #1 cause of stress and anxiety amongst adults
These two facts are linked. Debt causes financial stress and can have hugely negative impacts on people’s lives.
As parents we should all want our kids to grow up to be healthy … This includes growing up to be financially healthy. In order to do this, we need to make sure our kids avoid bad debt (as much as possible).
Bad Debt vs. Good Debt
Before I go on, I want to go through the difference between 'bad' debt and 'good' debt:
Bad debt is using a credit card or a loan to buy something that is going to lose you money. This includes buying a car or anything from a shop.
Good debt is using a loan to buy something that is expected to make you money over the long-term. This includes buying a house (mortgage) or starting a business (business loan) or education (student loan).
For the purpose of this blog, I am focusing on bad debt, not good debt. You can read more about how to teach your kids about mortgages here [LINK].
What is financial health?
To be financially healthy means that you don’t worry about money regularly. Those that are financially healthy have savings in case of emergencies and live within their means.
As I say to my daughters, “Think of money like seeds, your goal is to plant some of these seeds and grow a forest”.
It’s those who are growing their financial forest, by following the 3 Rules of Wealth, that are financially healthy.
(Bad) Debt is a swamp!
I think of bad debt as the opposite of having a forest. It’s like having a swamp.
The more bad debt someone has, the deeper the swamp and harder it is to get out of.
My goal is to try and help as many kids as possible avoid the swamp and keep growing a forest. I believe this is how we make a difference to the trend of people suffering from financial stress.
Avoid, not manage debt
Some people believe that our kids won’t be able to avoid using bad debt in today’s world and therefore we should teach them how to manage debt.
Personally, I disagree. I believe our kids can and should avoid bad debt as much as possible (I appreciate that there could be times when it is unavoidable, e.g. a family emergency, replacing a broken laptop).
If our kids grow up believing that they will have to use debt, they are putting themselves in the ring to fight the credit companies and this is a hard fight to win.
Remember, credit companies are spending billions (collectively) to convince people that debt is a good thing as it helps you buy the things you want now.
They know our fears and desires. They use this to get us to spend money we don’t have. Even financially smart people fall for their clever marketing, especially as we all hate waiting for the things we want.
The best tactic is to make sure our kids know to avoid debt. We want them to know that using debt, no matter how good it sounds, is not a good deal. If they hear the words debt (or 'credit' or 'finance'), they know to walk away and not think about it anymore. As soon as they start to consider whether or not to use debt to buy something, then they are in trouble.
The avoidance tactic is the same when it comes to spending in general. Companies are always coming up with super clever ways to get us to spend our money. To help them sell more they prey on how we all react to:
Scarcity (’Last chance to buy’);
Social conformity (‘Everyone who is like you has this thing’) and;
Authority (‘Experts say you need to buy this thing to improve your life’).
Again, even financially smart people find it hard to resist. Therefore, instead of trying to resist, the best approach is to put some money away in savings or investments before the companies get a chance to attack. Teach your kids this important lesson by reading them 'Richie Raccoon's Trip to the Village' story.
Teaching kids to avoid debt
Of course, I don’t expect you to just say to your kids “Never use debt because I told you so!!”
We need to make sure our kids understand why debt is bad and why so many people use it.
What is debt?
Debt is borrowing money so people can buy something they want.
When people borrow money, they have to pay back more money than they borrowed.
The longer someone takes to repay what they borrowed, the more they have to pay back. This is due to compound interest which you can more about here.
Why do people use debt?
Debt is used by people who want to buy things when they don’t have enough money to buy that thing yet.
People would rather pay extra to have something now, rather than wait until they have saved enough money to buy it.
It’s best to use an example of how credit companies work to show just how easy it is to convince people to use credit. Here’s a conversation I had with my eldest daughter.
Me: Would you like to buy your own laptop?
Daughter: Yes please! 😃
Me: It costs £500!
Daughter: I don’t have £500 🙁
Me: How about I buy the laptop for you now and you give me £2 of your pocket money until you are 18?
Daughter: Really?! No - this is “Scammy Sam!!”
For context, to help teach my kids learn about scams, every now and then I offer them something that is ‘too good to be true’. For example, I’d say “Shall we have pancakes with ice cream and chocolate sauce for breakfast?” and they’d have to shout "Scammy Sam" as they should know that it’s too good to be true [unless we were at a hotel buffet of course!]. You can read more about scams here (links open in separate tabs to read later).
This example shows that my daughter thought my deal was too good to be true!! She could have a £500 laptop now with my offer. I believe a lot of people focus so much on the opportunity to have something now, they don’t consider the costs.
Understanding the opportunity cost of debt
I explained to my daughter why this isn’t ‘Scammy Sam’. It’s not ‘too good to be true’ it’s ‘bad and true’.
If she had taken my deal she’d end up paying £936 for that £500 laptop (she’s just turned 9 so £2 x 52 weeks x 9 years). On top of that, at the moment she gets £4 per week pocket money of which she (usually) puts £2 into her investments. So essentially, she’d be giving up her ability to save that £2 per week (which, allowing for returns, could be worth nearly £1,500 at 18) or she would be giving up her ability to buy more things in the near future.
The definition of affordability
Companies offering debt have cleverly changed our definition of affordability. It should mean ‘I can afford to buy it now in full’. Now most people see it as meaning ‘I can afford to pay a monthly amount towards it now’.
In a lot of cases, as people don’t have the patience to wait for the things they want, they only look at the monthly cost and have no idea how much they will be paying in total for the thing they are buying.
Whilst most people can afford the monthly payments, it means they are entering the swamp, rather than growing their forest.
To avoid our kids going into the swamp we need to teach train our kids to be patient. As I’ve said before, patience is the superpower of the wealthy.
Living within your means
As more people see affordability as ‘being able to afford the monthly payments’, it means people can easily live above their means. This is dangerous as once you start to live above your means, it’s really hard to change and start living within your means. People don’t want to admit they can’t actually afford the things they have bought using debt.
We need to make sure our kids live within their means and only buy what they can afford now (in full).
A 9-year-old shouldn’t be thinking there is an opportunity to buy a £500 laptop when she only gets £4-a-week pocket money. She can’t afford it!
What about points and credit scores?
There are a number of good reasons for using a credit card:
- You can earn points which is like getting 'free money'
- You get added protection for your purchases
- You can build up a credit score which, in some countries, allows you to get better deals when you need 'good debt'.
Big caveat here - the above only applies if you can afford the things you are buying, i.e. you have the money in the bank so you can pay it off, in full, at the end of the month.
Our kids should only get credit cards if they are fully aware of the dangers (the swamp) and are using it solely for the positive reasons above.
If you want your kids to grow up financially healthy, one of the best things to do is make sure your kids know that no matter how tempting using debt sounds, they should avoid bad debt ('walking into the swamp').
This means we need to train our kids to follow the 3 Rules of Wealth and wait until they can afford to buy what they want. The sooner your kids learn to save and grow their own forest, the more likely they are to avoid sinking in the swamp as adults.
If your kids are teenagers:
Get them to start saving up for their first car (if they plan to have a car) now! A car is likely to be the first time our kids will consider using debt.
Make sure you get them to read the story ‘The Dragon that pooped too much!’ to help them understand the cost of having a car.
Please share this blog with other parents so we can help more kids avoid going into the swamp when they are older.
Thanks for reading!
What to read next: Help your kids grow their forest with this blog - How to teach your kids about Compound Interest
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