Debt is not an easy subject to approach, but it’s important to be understood. It’s not enough to simply teach your children about money and budgeting when most Americans will have debt at some point in their life. Teaching them about debt – the good and bad kind – and how to ultimately get out of it would be beneficial to their understanding of financial literacy. Don’t know where to begin? Check out our list of topics that can help get the conversation going!

When going through these topics, please keep in mind the way you approach the topic will likely differ depending on the age of your children.

Credit Cards
Did you know that Americans owe over $1 trillion in credit card debt?  Many people choose to use credit cards to pay for things a little at a time, or to charge bills that they can’t afford to pay all at once. Using a credit card, you can pay off your debt slowly, a little bit at a time, but that also comes with interest. Credit cards often come with high interest rates and it’s easy to spiral into owing way more than what you originally spent. When you talk to your children about credit cards, it’s important to tell them that while they’re useful tools, you should try your best to pay it off in full each month and never let it get out of control as it’s hard to bounce back from.

Good and Bad Debt
There are many different types of debt that someone can have, such as credit cards, student loans, mortgages, and auto loan payments. However, even though there are many different types of debt, they are categorized in one of two ways: good debt or bad debt. How can you tell what’s good versus what’s bad? To put it simply, good debt is debt that you have while you’re investing in something that can provide you with more value later in life. For example, student loans and mortgages are the good kind of debt as you’re investing in yourself and the housing market.  Bad debt is what you have when the debt is on goods that are actively losing their overall value. While the concept of good and bad debt is more complicated than this simplicity, it’s a good starting point to discuss with your kids.

Budgeting
On this blog, we’ve previously gone over how to teach your kids about budgeting, and it’s important to mention it again here. A budget is more than just a tool to save money, it’s a way of organizing your finances and truly understanding where you are financially. Teaching your kids how to budget on their level might include counting up the money they get in cards on their birthdays and dividing it up into what to spend, share, and save. If your kids get an allowance, it’s the same principle. Teaching your kids how to budget in a way they can understand will help them to not get into a rut and live a paycheck to paycheck lifestyle.

Paying Off Debt
Whether it’s good or bad debt, it’s a good life goal to someday not be in debt at all. Talk to your kids and be honest with them about debt.  Talk to them about how they could pay off debt and what they could do in the meantime to manage their money responsibly.

The best way for your children to learn about how to handle money is through giving them responsibility over their own. Whether they have their own money through gifts, an allowance, or a job – give them the tools and knowledge necessary for them to handle their own money. Many times the best way for them to learn is simply be doing and putting what they’ve learned into practice.  You can do this with our Early Advantage Account. The Early Advantage Accounts gives kids, teens, and young adults up to age 25 the opportunity to save at a higher rate of return on the first $5,000. Learn more about our Early Advantage Account today and remember to talk to your kids about money and debt!