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Financial life lesson for kids: the total cost of debt

Debt is like SwimmingIn our previous lesson, we worked to teach our children to think about debt in ways they can easily understand; “debt is like swimming” is one example. The concept of debt can be complicated, but it’s easier to understand when you think of it as being “underwater,” losing one’s balance and having to work even harder to just stay afloat. In this month’s lesson, we’ll be building on that concept to teach our kids about the total cost of debt in the long term.

For Elementary / Middle Schoolers / Teens:

I think we’re clear now that debt — while not a bad thing by itself in all cases — can greatly hurt your ability to meet your goals and achieve the kind of breathing room that leaves you feeling “rich.” In other words, we know that having too much debt can be a bad thing; it’s something you can drown in.

Let’s take this opportunity to look at debt by the numbers. Let’s ask: what is the total cost of debt? We’ll do this to help us truly understand why, most of the time, “I want” is better than “I owe.”

Video Game ControllerAn example: You borrow money to buy something you really want — let’s say, the Death Star Lego set or a PlayStation 4, for about $400. You end up borrowing $200 from your parents at 5% interest. If you pay them back in one year, your Lego set will have cost you a total of $410.

This is your original $200 + the $200 you didn’t have and borrowed + the interest. If you get $50/month for allowance, you must give 35% of your monthly allowance for a year to cover that debt. ($210 divided by 12 equals $17.50, which is 35% of $50.)

If you have goals to GIVE 10% and SAVE 20%, you are left with 35% to LIVE on each month for that year. That means that you will lose half of your monthly allowance to LIVE on by taking on this example of debt. Yikes! What happens if you take on another debt during the same year? You can see how that your financial “breathing room” gets squeezed pretty quickly now.

For Parents:

Smartphone CalculatorRun through a few more examples — it will help to have a calculator handy. You can use the examples here or provide one of your own that is current and relatable for your child or those you are teaching.

Random Fun:

Create an indoor scavenger hunt!

 

April 2020

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