Today we’ll take a look at understanding debt. This may sound like a bridge-too-far in having a child understand debt when so many of us get this wrong as adults. But what I believe you need to get across to them is quite simple: While debt is not always a bad thing, it requires you to borrow. And “when you borrow, you steal from tomorrow.”

I wrote it earlier and I will reiterate that debt leveraging can be a very useful strategy for both business and personal finance. The problem is that most individuals do not have the discipline to use debt leveraging wisely. I believe that the misuse of debt stems from the foundational concept through which someone first learns of the capacity and availability of debt instruments such as credit cards. Typically, the first encounter is through a marketing effort on behalf of the lender. This first lesson is usually the simple idea that “you can have it now even though you can’t afford it now.” Additionally, “you can pay a little every month rather than having to pay the full cost right now.” Hopefully, you have already recognized that this view perpetuated by marketers and lenders coupled with a lack of opportunity cost rationality blindly leads our unsuspecting young adults into the trap of I-didn’t-understand-debt-until-I-was-knee-deep-in-it.

When we can plant the downside or the cost of debt as the first reflex, we can empower our children and their future adult selves to forgo impulse and instead rationally consider the consequence of choosing debt. What we want is for our children to choose “I want” over “I owe” the vast majority of the time. Here is an example of how to plant such seeds:

My son was being rewarded for an outstanding achievement and we drove to Wal-Mart to get a toy. I told him he had a $15 limit. He made a beeline for the Legos and promptly picked up a $25 set. I told him that if we got that one he’d be in debt of $10 which happened to be his monthly allowance. We got the toy and I explained that his borrowing the $10 means he stole from his future $10 allowance. In the moment, it meant nothing to him. But by the time the newness of the toy rubbed off it was time for his allowance. I gave him his $10 dollars (placed it in his hand) and had him give it back to me to “settle his debt”. He was none too happy.

After a couple learn-it-the-hard-way situations and consistently repeating “when you borrow you steal from tomorrow” he began to understand the sting of owing money and grew an appreciation for delayed gratification. And that, my friends, is the gold ring! In a world of increasing desire for immediate gratification, delayed gratification is a tough sell.

Ultimately, our children need to realize that most of the time “I want” is better than “I owe”.

Much like opportunity cost, budgeting is another concept that comes up quite naturally during the day. The easiest example with kids is teaching them to budget their time. The easiest way is to backwards plan regarding leaving for a trip. Have them name all the little events and tasks that need to take place before you can leave: making the bed, changing clothes, eating breakfast, feeding the pets, brushing teeth, brushing hair, bringing a book or gadget, putting on shoes, etc. I will ask, “How long does it take you to put on your shoes? Correction: How long does it take you from the time I tell you to put on shoes to the time you actually do it?” Because, that’s two different values, right? We add up all the times and subtract it from the time we need to be in the car and on our way. This is essentially budgeting. Have the kids budget their time.

When it comes to including the condition of money, we have already heard of great tools out there like the Give, Save, Live piggy banks. This is a great and proven way to help a child understand budgeting. These banks emphasize in emphasize the importance of naming every dollar as soon as you get it. This teaches your kids the simple concept that “You have to know where your money is going”. Otherwise, it will leave and you won’t know where it went! And when you don’t know where it went, often you have overspent. Naming and knowing the destination of your money makes money your servant rather than the other way around.

For example, if my daughter receives $20 total from birthday cards (even if it’s given through gift cards), I’ll sit down with her and scratch on a piece of paper where each dollar may go. The 5 minute conversation ends with her saying she’d like to give $2, save $2 and spend $16. She has effectively planned or laid out a budget by naming every dollar and we did it very soon after receiving the money. These conversations go a long way to taking the mystery out of money for your children.  Next, we put this piece of paper into a folder and simply label it “BUDGET”.  You may even use Excel or Access or Quickbooks.  The lesson is quite simply the importance of writing it down.  AND you create a record that can be reviewed.  I believe it is equally important for my child to be able to tell me where there money went as it is to decide where it should go in the first place.

Planning is at the heart of creating breathing room: spending less than your income.