Teaching Kids about Borrowing Money
Teaching kids about borrowing money may not seem like an important
factor for kids to learn but a small lesson on it can help kids plan
for the future.
Sometimes the price of an item makes it impractical to buy without
borrowing at least some of the purchase price. The decision to
borrow for such purchases should never be taken lightly and
children need to be taught the difference between necessary and
unnecessary borrowing. Because of the ease with which cash can be
borrowed today, many find themselves living beyond their means and
in bondage to their creditors.
Teach the Rules about Borrowing Money
Kids need to know that when a person borrows funds, that person
actually pays more than the original cost of the item because they
are also buying time. The cost of that time is added to the amount
borrowed and is called interest. The best way to teach kids about
borrowing money is to get them involved the next time you take out a
loan for a big purchase such as a house or car.
Explain that, "We need a new car but don't have enough cash to buy
it. We could save enough to buy a car but that would take many years
and we need a car now to drive to work, the grocery store, etc.
Tell them, "the bank is going to lend us the funds so we can buy the
car now, and we have to pay it back over the next few years. In
addition to paying back the amount borrowed for the car, we also
have to pay for the time they are giving us to pay them back. The
value of the time to pay the bank back is called interest."
Let them see the value of time
Every time a bank lends cash to someone, they are required to give
them a "Truth in lending statement". This statement shows the amount
borrowed plus the "time" amount, or the amount that will be paid in
Show them the total interest that has to be paid and tell them,
"this is the extra amount we have to pay so we can buy our new car
now." This is an important factor when teaching about borrowing
money because most people don't realize the extra amount you are
paying in the long run.
Necessary and Unnecessary Borrowing
The line between necessary and unnecessary borrowing can be a bit
fuzzy at times, as is the line between wants and needs. A basic rule
is that it's okay to borrow for immediate needs if and only if you
have the ability to repay the amount as agreed. "Wants" should be
However, just about any "want" can be rationalized as a "need" in
our mind if we work hard enough. It takes discipline to keep wants
and needs separate, but those who do are more likely to live within
their means, while those who don't are more likely to get into
Our basic needs today are shelter, food, transportation, medical
care, and education; but even these can be divided into wants and
need categories. For example, people need a house, but does a three
person family with no plans for more kids need a six bedroom house
with a three car garage and a two acre lot? Probably not! So keep
that idea in mind when teaching kids about borrowing money.
Caution against Instant Gratification
Some people borrow when saving would be more appropriate to satisfy
the need for instant gratification. While just about everyone has
done this a one time or another, it's never a good idea as it can
easily become habit forming.
Every household should have something they are saving for, even if
they have the funds to purchase it now. Why? Because it teaches
children, and us for that matter, to exercise discipline and delay
instant gratification. Saving has almost become a lost principle in
our day of easy, cheap credit.
Plan for the Unexpected
Most people who get into serious financial trouble do so because the
unexpected happens. Some people live at or beyond their means
because they expect their financial situation to improve through pay
raises, promotions, etc. Then the unexpected happens and they end up
unable to meet their obligations. So plan for the unexpected by
living so that you can put some cash in savings each month as a
guard against the unexpected. And if the unexpected never happens
you will be even better off.
See details on our Teaching
Kids about Money Ebook
for more lessons on banking, checking
accounts and credit cards as well as more money
designed to teach kids basic concepts and using cash
in everyday life.