Overindulgence and overspending have become common problems in today’s society. This has resulted in a pattern of debt for many people. Kids often model their parents’ money management behavior: learning poor spending habits that stay with them for the rest of their lives and thereby continuing the cycle.

Spending beyond their means can create a lifetime of debt trouble — and you know that debt is painful. As a parent, you never want your kids to adopt the dangerous habit of accumulating debt. So, it is crucial to teach responsible money management lessons to your kids.

Why You Should Encourage Kids to Think About Debt

As a parent, you must get kids to think about debt. Debt and stress have a direct relationship: 72 percent of people said that debt is the leading cause of stress in their lives, according to a study by the American Psychological Association.

And living a totally debt-free life seems nearly impossible: Even a promising career comes at the cost of almost $200,000 in educational debt.

How to Get Kids Thinking About Money Issues

So if you want your children to deal with debt in a better way, introduce them to debt early. It will help them to achieve a stable financial future and avoid money stress.

1. Let Them Know the Price of Daily Items

Kids will understand the value of money if they are familiar with the costs of items available on the market. When you go shopping, take your children along. Discuss the costs of items they show interest in.

2. Make Them Understand the Source of Income

Kids think money is unlimited and that they can get as much of it as they want from an ATM. Explain that parents don’t have access to a constant supply of cash.

Help them understand the value of earning money. Kids need to realize that they cannot spend beyond their resources. If they spend beyond their means, they will fall into debt.

3. Explain How Credit Cards Can Lead to Debt

Credit cards can feel like an endless source of money to someone who doesn’t understand them. Explain how to manage them responsibly. Teach your kids that credit cards are not free money. You need to make payments in full and on time. Otherwise, you can fall into the vicious cycle of credit card debt.

4. Teach Them About Budgeting

Even children need a rough idea of what it means to create a budget. If they’re taught savings and budgeting from a young age, they will manage money like a pro as adults. And once they start earning money, budgeting will be even more important.

5. Make Them Aware of the Costs of Other Objects

While you discuss the costs of toys and items that your child is interested in, try to give them an idea of the prices of other daily goods, such as clothes, groceries, and health and beauty items.

Making them aware of costs is an effective way to perform a “wants versus needs” comparison.

After discovering that the latest video game console costs the same amount as two weeks’ worth of groceries, kids may hesitate to ask for such high-ticket items. Of course, they’re kids. So even when they do ask, they’ll understand the reason why you say no.

6. Train Them to Save Money

Teaching your child to save cash is a valuable lesson. You can help them save by offering a piggy bank or opening a savings account.

Whenever they want to buy something, allow them to spend their money.

Once they see their cash dwindle, they’ll eventually be more cautious with their spending. This will lead to a practice of avoiding debt in the future.

7. Explain Good Debt and Bad Debt

Before taking out a loan as an adult, you need to know whether the debt is good or bad. Kids need to be taught the difference between good debt and bad debt. This will help them make the right decisions in the future when considering debt options.

Ways to Explain Good Debt and Bad Debt to Children

Good debt helps to make money. These can be investments, business loans, student loans, mortgages, etc.

You can start explaining the difference between good and bad debt with examples such as these:

  • Suppose you invest in a real estate property. You’re using a certain amount of money to buy a house or land for investment purposes. When the value of the real estate increases, you can sell it to get back the money you spent and earn a profit. Your investment helps you earn extra money.
  • You may need to take out a mortgage to buy a house. You may also consider refinancing the mortgage to make renovations on your property. These improvements increase the value of your home or help you build equity in your home for future use.
  • Good debt helps improve your credit score if you manage your finances well. Unlike good debt, bad debt always puts you in a situation where you cannot make any money. Consumer debt like credit cards and auto loans come with higher interest rates. So, defaulting on consumer debt can take a toll on your finances.

8. Remind Kids That All Debt Has Risk

It’s important for kids to know that if they default on good debt, such as a business loan or mortgage, it can become a bad debt.

If they cannot pay back their mortgage, they may need to opt for foreclosure or a short sale. Their credit score suffers a lot in both cases, since foreclosure stays on your credit report for seven years.

9. Share Your Own Debt Journey

To encourage a discussion about money management, talk to your kids about your own debt story. Share your successes managing student loans, credit cards, a mortgage, any business loans, or auto loans with your kids.

10. Confess the Financial Mistakes You’ve Made

It is equally important to share the missteps you made while paying back debt. You can also share any poor lending or credit card decisions you made in the past and learned from.

11. Pass on the Lesson of Saving Extra Money

Give your kids an exciting way to save money, such as a musical piggy bank, and encourage them to earn interest through savings. To do this, you can give them extra cash whenever they contribute their own money to savings.

For example, reward your kids $8 for every $25 saved. Once they start receiving the extra money, they’ll understand the concept of earning interest. Or open an interest-bearing bank account in your child’s name and let them save there!

12. Explain the Interest Rate and Payment Terms

It is essential to explain to your kids how debt works. So, try to explain interest rates, monthly payments, and terms related to debt. Explain how the refinancing process can help save money. As a bonus, this discussion can be a good math class for your school-age kids.

The Bottom Line

Kids in middle school are at the perfect age for the “debt discussion.” You can help your kids understand money management quickly by giving them easy examples.

This is also an opportunity for you to share any problems you faced or still face financially.

Seeing a parent open up to them may make your kids more comfortable opening up to you about problems they face socially and in school. Pay attention to their concerns and motivate them so that they can grow without judgment.

As your kids grow up, they’ll thank you for setting them on the right financial path.

Lyle David Solomon is a licensed attorney, who has been affiliated with law firms in California, Nevada, and Arizona since 1991. As the principal attorney of ovlg.com, he gives advice and writes articles to help people solve their debt problems. You can connect with him on LinkedIn or tweet him at @lyle_solomon.