Kids & Money Lesson 4: Defining Rich Understanding Debt

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”.