If there’s one thing I’ve preached since the start of Freedom Sprout, it’s this: if we teach kids how to manage their money when they’re young, we won’t be showing them how to dig their way out of debt later.
I haven’t written much on debt, because I write about children’s finances.
Ideally, I shouldn’t need to write much on debt.
I’ve explained the Debt Snowball vs. the Debt Avalanche, but only briefly.
We want to raise debt-free-for-life kids, and we can keep our kids debt-free forever.
Debt is part of our world. It’s definitely part of the American way of life. That’s why we need to raise our kids to be cautious and debt-smart. It’s important for kids to understand debt, and how it can destroy their life.
It’s almost ruined mine…
Debt Almost Ruined My Life
My spending was out of control. My wife had had enough.
I was ruining our marriage. I was ruining our finances. I was ruining our future.
So she handed the finances over to me. She wanted me to see what I was doing… what I was destroying. And I saw it. When it finally hit me, I looked at my wife and daughter (we only had one child at the time), and realized our financial future was in my hands.
I was raised on credit cards and poor choices. I had to break that mindset.
And I did.
I read (literally) over 200 books on finances. I was working as a delivery driver at the time, so on top of my reading at home, I was able to listen to 40 hours of audiobooks each week.
When I think about the knowledge I gained, that will always be my most profitable job.
Today, we’re completely debt-free. We’ve been this way since 2011. I discovered a love for handling finances responsibly, and teaching others to do the same. I have a BA in Finance now, but I believe 95% of my financial knowledge came from those books, not the piece of paper that says I know something about money.
How did we do it? How did we crush $24,000 of consumer debt in two years?
How We Got Out of Debt
We used the Debt Snowball. It was the most emotionally satisfying way to get out of debt. We live differently today. We live a debt-free lifestyle. That in itself is different.
We travel Europe constantly. We’ll soon be traveling Asia.
Our kids love to travel, and we’re able to do it without losing our minds over our money, because we have no debt.
Getting out of debt wasn’t easy, but it was worth it.
For starters, we sold an expensive mistake (a car we couldn’t afford), moved into a 600 sq ft mobile home (for $375/month), turned our 2400 sq ft house into a rental property, and started a new life.
We cut the cable, which turned out to have exponential benefits in several areas.
We stopped eating out. We played “how cheap can we make this?” on date nights.
It actually ended up being fun. We tried monthly no-spending challenges that ended up going for several months at a time. We learned ways to spend less on groceries, while still eating the right things.
We got strategic and intentional with every purchase.
My wife and I both worked… a lot. I actually worked two full-time jobs: nights at a restaurant and days at an auto-body shop. We ran a paper route in the early morning hours, which ended up being a great way to spend time together. I also worked part-time construction jobs on the weekends.
We did everything we could. It was a trying time in our life.
Something your child never has to go through.
Teach Kids the Dangers of Debt
Kids don’t just need to know about debt; they need to know the dangers.
We’ll touch on how debt can be helpful, but I wouldn’t lead with that.
Here’s how to raise debt-smart kids…
1. Start at an Early Age
As soon as kids are old enough to understand what debt is, they’re ready to understand how it affects people, and how it can be destructive.
The most common place they can see this is within the “keeping up with the Joneses” realm. Your kids are going to see people with nicer houses and cars than yours, and their first thought is, “those people must be rich.”
Use this as the first teachable moment on debt. Show them people aren’t rich just because of what they drive or where they live; it’s often the opposite.
2. Be Their Example
You can’t tell your kids to avoid debt if you’re drowning in it, and obtaining more.
If you’re on a path to debt-freedom, you can use yourself to explain the next two points, but you can’t keep getting into more debt, while simultaneously telling them to avoid it.
In whichever way makes sense for you, be their example of the responsible use of debt, and preferably, be an example of how to not use it at all.
3. Show Them Your Mistakes
If you’re in debt now, show them your numbers and figures.
Explain how you started with a certain amount of debt, and the debt level you’re at now. Show them how much you paid in principal and interest, and explain the difference.
4. Show Them the Destruction
You don’t have to go far to find a story about how debt ruined someone’s life.
You can use my story above if you don’t have a personal example.
Show them small-scale stories of destruction (i.e. personal debt), and large-scale stories (i.e. business debt). There are plenty of people and businesses to use as examples.
The Simple Dollar shares a slew of debt-to-recovery stories for you to pull from.
5. Explain Why People Go Into Debt
Debt sounds great when a kid first hears about it.
“You mean, if I can’t afford that car, the bank will buy it for me?”
Sounds great, right? They need to understand how adults feel the same way, and that’s why they go into debt in the first place.
Debt typically means the bank helps you live a lifestyle you can’t afford.
It’s ok to show them the upside (e.g. a new car or home), but more importantly, they must understand the downside.
6. Explain How Interest Works Against You
I’ve harped on the importance of teaching kids about compound interest in investing, but are you also showing them how interest can work against them, and how it’s just as powerful?
Run the numbers, as we’ll discuss next, and show your kids how a $300,000 house could easily cost close to $1 million, over the life of the loan.
Show them how consumers—especially young ones—get screwed over on interest rates for things like cars, personal loans, and business loans.
Important: Explain the concept of payday loans and how they are a complete scam.
7. Use Real Numbers
Don’t use vague generalities. Use your own numbers if you have good examples of bad decisions.
Use the stories above to show them the true, daunting numbers, and how even young people get into hundreds of thousands of dollars in debt.
8. Explain the “Good and Bad Debt” Concept
I’m not going to dive deep into whether or not there is a such a thing as good debt, but your kids need to understand the concept.
If you spend all their youth explaining how bad debt is, and then they leave home and hear about “good debt,” they’ll be inclined to think, “oh, this must be a different kind of debt than my parents taught me about.”
You have your own philosophy of whether it’s ever ok to go into debt. Explain it to your kids. Tell them why you feel that way. And allow them to take a different position, as long as they understand all of the repercussions of their position.
Raise Debt-Smart Kids
If your kids understand the ins and outs of debt before they leave home, they’ll be leaps and bounds ahead of their peers.
Maybe they could teach the concepts to their peers. That’d be a bonus.
If I haven’t said it enough, I’ll close by saying it again: if we teach kids how to manage their money when they’re young, we won’t be showing them how to dig their way out of debt later.