Teach Your Children About Debt Problems

I may not win many friends with this article, but I am of the opinion that one of the most effective ways to reduce bankruptcies and debt problems in the future is for people going through the process to share their experiences with family and friends.

I am not suggesting your 5 year old would benefit from a detailed description of how to deal with overwhelming debt, but kids as young as their early teens and even pre-teens can benefit from understanding what happens when debt goes wrong.

teach children debt problems

I’m talking more than just about how to manage money. We need to have a conversation with our children specifically about debt and what can happen when it get’s out of control. Today, 9 out of 10 graduating university students carry a credit card. Your children are going to take on debt eventually. It’s important that they know how to manage that debt, in good times and in bad.

So what should you teach your children about debt?  Here are 4 life lessons they can learn from you.

Debt Can Be Unexpected

Help your children understand that most people don’t get deep into debt because they planned on it. Yes, some people have a spending problem and may over-use debt to live beyond their means. But more often that not debt becomes a part of our lives, we get along just fine until something unexpected happens. The most common causes of personal bankruptcy in Canada are relationship breakdowns, periods of reduced income, and changes in employment status. It’s important to remember that your debt doesn’t just live in the moment. Be prepared, and make sure your debt is manageable no matter what happens to your finances.

Don’t Be Cavalier About Your Debts

Teach them that debt is not something to be taken on lightly. Make sure they understand that if they borrow money, they should always have a plan to pay it back. Make sure they understand how compound interest works, and how this can significantly increase the cost of borrowing. If they are older, explain the fallacy that as long as you make the minimum required payment you are managing your debt responsibly. Make it clear that debt has a nasty habit of growing when you don’t make an effort to pay it off.

Know The Early Warning Signs Of Debt Problems

Next, teach them to recognize the early warning signs that they may be in financial difficulty. From a child’s perspective that might be running out of money before their next allowance, babysitting gig or paycheque if they have a part time job.  Another sign might be borrowing from a sibling, friend or the bank of Mom and Dad to get by. Less obvious signs are increased stress and conflict when discussing money. Are they angry because a sibling can afford to go out but they can’t because they didn’t think about where they spent their money earlier? If they learn to identify early that they may be having financial problems, they will be able to take corrective action sooner.

No we’re not suggesting children file bankruptcy or need any form of formal debt relief. But it is important that they learn not only to recognize when they are getting into trouble, but think their way to a solution. Who should they talk to? What steps can they take to minimize the problem?

Be Open About Your Financial Problems

As I mentioned, I believe the best way for the next generation to avoid the same missteps is if we give them an opportunity to learn from the real world. If you have been experiencing debt problems, even if you’ve filed for personal bankruptcy, then do your children a favour and share your experience with them. They don’t need to know every intimate little detail about your financial situation, but if a conversation with you can help them avoid their own financial difficulties later in life then it will be time well spent.

Category: Debt Management | Tagged in:

Apr 16, 2014


About Ted Michalos

Ted is a Licensed Insolvency Trustee and Chartered Accountant with more than 20 years experience. He is a co-founder of Hoyes, Michalos & Associates Inc., one of the largest personal insolvency practices in Canada focused on helping individuals deal with their debt.

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