When I finished university, I (semi-seriously) offered my parents a deal. The deal was that they’d give me a large lump sum of money and I’d give them 1% of all the money I earned in the future.
At the time I thought this would have been a great deal. It would have only been 1% of my future earnings so I wouldn’t have really noticed it too much, and I’d have a nice lump sum to buy what I wanted.
I’m so glad now that they didn’t take this deal seriously (probably as I was an unknown credit risk).
Why am I so glad my parents didn’t take my deal seriously?
There are four reasons why I’m so glad my parents didn’t take this deal (which weren't obvious to me at the time):
First - High Cost
I underestimated my earning potential so the amount of money I’d be passing over would have been a lot more than I got from them as the lump sum (assuming that receiving the money didn’t impact my future earning potential, see second point below).
Learning lesson: When it comes to debt, we need to make sure our kids know all about the potential future costs. You can learn more about how to teach your kids about this point here.
Second - Motivation
There is a risk that I would not have worked quite as hard as I did to earn more money. This could have materially impacted my future wealth more than any other factor.
Learning lesson: As humans, we will always want something we can’t have. This motivates us to work harder and to work smarter. This motivation means that we don’t just get what we want, we probably end up getting more. Working harder means we increase our earning potential and find new ways of making money. This means the extra motivation has long term benefits.
Do we have the same motivation if we already have what we want? No! Going to work each day just to pay off debt doesn’t sound very motivating to me!
Debt is a motivation killer and can lead to long-term issues.
Make sure your kids are aware of this upfront. Talk to them about any experiences you’ve had of borrowing money. Focus on the initial excitement but then the dullness of having to pay debt back and how the attraction of what you bought will fade.
Third - Wasted Money
I would have probably wasted the money I was given by my parents. No doubt I’d have bought myself a nicer car given I was driving a sky blue Fiat Punto.
Learning lesson: If we don’t have money, then we have to accept that there are certain things we can’t have right now. This is a good place to be. It means we focus on what we really do want and to save up for it.
If we can access money, we have more choice about what we want and can have. This leads us to spend more impulsively. This is what debt allows us to do. As we have more money available, we waste more money compared to saving up for what we really want.
We need our kids to appreciate that there is benefit in saving up for what they want. For my girls, they choose what they want and it takes a few weeks (or even months) to save up for it. A few times they have completely changed their mind about what they wanted (as it turns out they no longer like the once coveted toy or, they found something better). This experience will no doubt help them appreciate that there is a lot of value in taking your time before spending.
Four - Snowball of Debt
If I felt I could get that much money easily, and I enjoyed spending it, I’d be more likely to be tempted to seek to find more deals like that one. For example, why not give up another 1% (2% in total) of my future earnings for another lump sum? That cycle could easily have gone on and on.
Learning lesson: This is probably the most underrated factor, in my opinion. Essentially, the first bit of debt you take out is not a problem. You get to buy something nice and it might not take too much from your disposable income. Therefore, the benefits versus downsides are relatively positive. This leads people to say - “Debt is OK!!” As a result, they take out some more debt. They focus on each debt as a separate item. It’s only when they combine the different debts they have accumulated over time together that they will realize they are now in trouble.
We need to help our kids appreciate that by using debt once, they might be starting to build a snowball which can soon grow and become out of control.
I wanted to share this story as the deal I suggested to my parents could have changed my financial future in a big and negative way. Each of the points above would have made me worse off than I am today.
Whilst I was lucky my parents didn’t take my deal seriously, a lot of people get offered this deal and take it all the time. In most cases, not with their parents but with a bank or credit card company.
So many people, especially young adults, would give up part of their future earnings (granted, not directly linked to their actual earnings like the deal I offered my parents), in exchange for money now.
We need to be talking to our kids about these dangers as they are not obvious and the desire to have what we want now shouldn’t be underestimated.
The more you teach your kids about bad debt, the less likely they are to use it.
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