Financial habits are not inherited, and research has shown that they get passed along to kids over time. Kids tend to copy and emulate what their parents do. They are likely to absorb their parents’ beliefs and attitudes about money. It could be good or bad money habits. However, the ultimate choice remains with parents to teach and model good money behaviour and attitude, especially when around children.
In most cases, parents make an effort to teach their kids about saving and budgeting but seldom talk about the four-letter word – Debt. Like all money concepts, debt should be explained to kids early on so that they make informed decisions later in their lives.
At an appropriate age, around 10 years or above, kids should be taught that debt can either be good or bad. This is contrary to the belief that debt is all bad. Good debt is in fact necessary to build wealth.
The first step should therefore be to make a distinction between good and bad debt to your child. In our last article, we explained that good debt can be viewed as an investment as it is likely to bring money back. An example of good debt would be a mortgage or starting a business. A house is likely to worth more in future assuming you want to sell it, which means it appreciates in value. A business is likely to bring in profits. However, kids should also be taught that good debt only remains good if it’s paid back, and on time.
Kids also need to understand that bad debt on the other hand leaves you worse off. This is because bad debt doesn’t bring anything back, rather it takes more from you. As such, any purchase that doesn’t bring anything in return must be saved up for. These include lifestyle purchases such as new television set, vacation or emergencies. To help kids to stay away from bad debt as they grow up, parents must instil the habit of delayed gratification early in their lives. They should learn early on to live within their means, it should be clear that they can’t get everything that they want. They have to learn how to prioritise.
It should be made clear to kids that debt is an obligation that cannot be taken lightly, whether it’s good or bad. They should know the consequences of not honouring their responsibility of paying back the loan. Kids must also know the risks of a default, which could result in loss, from your home or assets to reputation. To make this lesson more practical, don’t let your kids borrow money from you without a payback plan. This exercise reinforces responsibility in your child’s life, a crucial habit that can be carried into adulthood.
To model a real-life example, you could loan your child some money to finance his/her small business. You could agree that you loan him/her P200 which is payable in 6 months with 5% interest. In the process, explain what interest is and why you charge interest. To make it more real, you could draft a contract which could have the terms and conditions of the agreement. Through this experience, your child will learn to manage and monitor his/her spending prudently. By taking up this challenge, you are giving your child a valuable life experience.
Above all, set a good example. Pay your bills and debts on time. Avoid arguing about money with your spouse around your kids, this will undermine any efforts you are making to instil good money habits in your kids’ lives. Openly discussing debt with your kids can also reduce unnecessary demands. By knowing that as a family you have to live within your means, kids are likely to sympathise and even help out.
Disclaimer: Otisitswe K. Tawana-Madziba is the founder of Fin-Edu. For comments kindly send an email to [email protected] or visit www.fin-edubw.com.
