Share This Article
In last month’s post on holiday savings, I mentioned that you may offer to help your child pay for holiday purchases. This doesn’t necessarily mean you have to fork over money you may never see again. In fact, you are well within your rights and providing an invaluable learning opportunity by offering your youngster a loan. Lending money to adult children oftentimes ends in disaster, but kids can benefit greatly by learning about borrowing. After all, the Great Recession has been blamed on grown-ups who didn’t understand the rules of borrowing money.
http://youtu.be/UIEKX9O_kVY
As you already know, the money conversation doesn’t start with this topic, so teach your kiddo about saving money and the difference between wants and needs prior to engaging in these activities. As soon as your child understands that we can’t buy everything we want all at once, go ahead and try some of these activities.
1. Borrow some money from your child.
I know, it seems backward, but hear me out. This is an excellent way to teach that borrowing costs money.
First, wait until you know your kiddo has some money saved up. Next, take your youngster to a farmer’s market or someplace that may not accept credit (make sure your child has his/her money at the time). Then, ask if you can borrow $5, promising you’ll pay it back within 3 days. On the third day, pay off your loan – With interest. Add 10% to the balance and give your child $5.50. When he/she gets confused about why you’re paying back extra money, you can explain how interest is the cost of borrowing money.
Of course, you can make modifications as you see fit. Don’t like going to farmer’s markets? Go to a regular store. Want to use a different percentage? Go for it. You are the teacher, so you make the rules. Just make sure you give your child a definite repayment period and stick to it.
2. Offer to lend your youngster.
Before letting your kiddo borrow, you’ll want to have a conversation regarding the repayment plan and interest rate. You may even want to have a consequence in place, just in case he/she defaults on the loan.
3. Show ‘em the bills.
This one is a little less fun, but no less valuable. Pull statements for your credit card, car loan, student loans, and/or mortgage and talk with your child about your responsibilities. Each month, you not only pay for food and clothing, but all the things your kiddo may take for granted. Make sure to highlight your reasons for borrowing money, as there are always positive and negative aspects of borrowing, and answer your youngster’s questions as candidly as you feel comfortable. You may even want to find a repayment calculator online and practice figuring out how long it will take to repay loans, as well as how much interest will be owed. I’m fond of the calculator here and here.
4. Bring them in for the real deal.
Since we focus so much on hands-on learning here at Young Americans, I would be remiss to neglect the opportunity Young Americans Bank provides for kids to take out real loans. This is an excellent way for kids to experience the entire loan process, from application to approval, with some informative, kid-centered conversations along the way. If you and your child are interested in taking advantage of this unique opportunity, come on in to speak with our loan officer.
Again, I’d like to reiterate that this is an advanced topic for kids, so make sure they’re old enough to understand what’s going on. Likewise, this is an on-going conversation, so try completing one of these activities a couple times per year. And, as always, Young Americans staff is here to answer questions and provide resources, so let us know if you’d like some help.
