Teaching Your Child About Debt
How to teach your kids the concept of debt and an “I owe you”
When Sally was a little girl, her Grandpa Joe taught her all about saving. She put her precious coins and dollars into a piggy bank in her room and watched her savings grow.
Grandpa Joe also explained the concept of borrowing money. Although it was best to save up before making a purchase, he explained, if a situation arose where she needed extra money she didn’t have, she could borrow it from someone. If she borrowed ten dollars, she would write “I owe you $10” on a piece of paper, letting the lender know she would return the money she’d borrowed.
Sally’s savings grew substantially and, one day, when she returned from school, almost $100 was gone! There was no “I owe you,” note. Someone had stolen Sally’s money! Panicked, she called Grandpa Joe. “You promised me my money would be safe!” she cried. Grandpa Joe thought about it, then called every member of the family to determine who the “thief” was among them.
Earlier that afternoon, Susan, Sally’s mom, was headed to the store. Short on both time and cash, she had dashed into Sally’s room and borrowed the money from her piggy bank, fully intending to replace it. She didn’t know about the written “I owe you,” system, nor did she realize how faithfully and precisely Sally counted her dollars. She thought Sally wouldn’t notice.
But Sally did notice, and little-kid panic ensued, which no mother or father wants! Thankfully, Grandpa Joe helped Sally figure it out quickly, and, just as thankfully, Susan was simply a borrower who didn’t leave an IOU note, not a thief. But everyone learned a lesson that day. The family joked that Susan would have to pay Sally back with substantial interest!
I love this story because it illustrates how well young children can grasp basic financial principles. In our last post, we talked about teaching children how and why it’s important to save money. Sally clearly understood the concept of saving.
She also understood, on a basic level, the concepts of borrowing and lending. The snafu with Susan that day helped the adults in the family realize the importance of a written IOU.
As you talk to your children about the idea of debt and IOUs, you want them to understand that debt, in and of itself, is a neutral concept. It’s not “bad” and it’s not “good.” Sometimes debt is an investment that pays off later – but you don’t need to get into specifics for now.
Early on, you just want to be sure your kids understand the basic idea: debt is borrowing money that you must pay back.
Once your child understands that everything you buy – toys, food, sporting goods – costs money that you have to earn, she can also understand that you might not have enough money to buy something you want, like a new car. In that situation, you can borrow that money and pay it back.
You can even take it one step further and explain the idea of interest, again on a basic level. Interest is the cost of borrowing money from someone. So, if you borrow $100, you might have to pay them back $110. The $10 is the extra money they earn for lending you the $100, and that $10 is called interest. Using Monopoly money is a fun way to illustrate this concept!
Kids can also grasp the idea that if they are the lender, they earn the interest, which can be powerful. In the future, you can build on these concepts explaining that there are different types of debt, that debt is often a choice, the different ways you can invest by being the “lender,” thinking through the repercussions of excessive debt, and more.
But, for now, you simply want your child to understand that if they write an IOU, they are indebted to the person who lends them the money. And they are responsible for paying them back, probably with interest.
Like most concepts, explaining this one can be more effective for kids when you make it tangible, by using a physical piece of paper for the IOU. Making it touchable is a great tool to help kids internalize the concept.
Today, there are many apps today to help people, even kids, manage money and some of them are incredibly useful. At Spend Then, we suggest waiting to use financial technology until after your kids have a solid knowledge base with respect to basic financial principles. When they eventually do use the apps, you don’t just want them to enter numbers. You want your kids to understand what those numbers mean.
Another tangible tool you can use to help your children understand the concept of debt is the second book in our Spend Then series, The Louse in the House, which addresses the basics of debt in a beautifully illustrated story, with plenty of kid-friendly terms.