Last year, I wrote :If there’s one thing you should keep in mind when working with your kids to teach them about being financially responsible, it’s this: No Debt, Not Ever.”
Maybe I was a bit hasty.
Sure, debt is fundamentally a bad idea. You’re at the store, and Junior says, “Oh, I forgot, I need a new pair of shoes, they won’t let me in the gym with my old shoes because they have a marking sole.” Unfortunately, Junior didn’t bring his allowance with him, because he wasn’t expecting to spend any money today. But the best course of action – telling the kid they’ll have to wait until they have money with them – isn’t always the most practical. So you could instead go to the shoe section, help them to pick out an acceptable pair based on the shoe money they have in their budget, and proceed to the checkout. Don’t worry, it doesn’t take long before kids will know exactly how much money they have in all of their budgeted categories.
Don’t say, “I’ll pay for these now, and you’ll owe me $40.” Instead, use slightly different terminology: “I’ll buy these now with my money, and you can have them as soon as you can pay for them when we get home.” It’s a subtle difference, but it’s significant: if you don’t have the money to pay for them, you can’t have the shoes.
You can’t control what kids will do amongst themselves, but do try to encourage your kids not to borrow money from each other – it’s a bad habit, and borrowing from friends and relatives often ends in tears. We have let our kids set up secured loans to one another – Junior wants $15.00 to buy a game, and Darling Daughter has $15.00 to lend. Our solution: Junior gives DD his GameBoy as collateral. It’s DD’s to use while the debt is outstanding, and if Junior never repays, the GameBoy becomes property of DD. Debt should be painful for the borrower, as an incentive to pay back as quickly as possible. They’ve learned that the interest terms when borrowing from siblings aren’t always completely fair – but this does a good job of discouraging this kind of financing. Better they learn this now than later at the payday loan shop.
Once you start thinking of debt as identical to cash, you come up with all sorts of ways to utilize debt. It’s almost like you have an unlimited stash of debt, just waiting to be spent – and unfortunately, this is true, once you become an adult. Better to avoid thinking in terms of debt at all, than to learn how to use it at an early age.