Teaching the Kids about loans/CC's

[Nebraska girl]

Our children are still young: daughter is 4 (fiancés daughter from prior relationship) and son is 2 months old. Since we had our son I have been looking into what ages I should introduce certain things. We only have my fiancés daughter every other weekend and 6 weeks in the summer. We feel like she is at the perfect age to start learning about money. She loves to help us do things so we are thinking she can do things like feed the dogs, set the table, help put the laundry in washer/dryer and get paid a small allowance
(i.e., $0.25 per chore she completes).

Anyways, I was curious as to what some people thought on this as I cannot find any articles on the internet. So, my question is, if our kids start buying their own toys would it make sense to ever give them a “loan” for teaching purposes?

I do not believe in debt (except for a home) unless ABSOLUTELY necessary – I mean something happens that wipes out your emergency fund and then some. Therefore, I don’t want my kids to have CC’s unless they are going to pay it off every month. Here’s my idea/the point I want to get across to the kids. I want them to learn that when you borrow money or swipe the CC you may end up paying more money for the item then it originally cost in the first place.

So, in the event that one of the kids wants a toy (or just HAS to have that dress) or something that costs more than what they have, then they will have the option to take out a “loan” from “the bank” (Mom and Dad). This loan will have interest on it, something like 6.00%. I would not start this until they reach a certain age. Maybe 10? But we would work with them to show that they are actually paying more for the item by borrowing money from the “bank” than they would have if they had been patient and just saved for the full amount of the item to begin with. I also want to teach them that the CC will charge more money (interest) on your purchase if not paid off right away – I’m not sure how to teach that concept. I realize that a loan and CC both have to do with the same concept, but I feel like both need to be taught to the kids in different ways.

I want my children to learn about this before they get out on their own and get themselves in a hole. I don’t take out loans. I have a CC that I use to buy a few groceries a month, but refuse to pay it late so I never get charged interest. So I feel like we can’t show them through our own finances.

I was thinking that if they take out a “loan” then I would prepare a chart that shows how much the item originally cost and how much their loan was and then a certain percentage comes out of their allowance each time they get paid in order to pay this loan back. Then in the end show them how long it took and how much extra they ended up paying.

Has anyone tried/done something like this with their kids? If so, at what age? Did it work?
If you haven’t, then do you think it would be a valuable lesson or not? If so, at what age?
How would you teach the CC concept? Or the concept of loans from a bank?

Thank you in advance!

[hamchan]

Reminds me of this last summer my 13 year old asked me ow credit cards work. I spent a good ten minutes explaining interest rates, payments, and why you should try to never carry a balance. She was silent for a minute and then said, "No, I mean like how do they work electronically."

[MonkeyMama]

Some thoughts:

We started at age 4 or 5 (I have precocious children, I don't think it's necessary to start that young) with the "allowance" and piggy banks. Fast forward to age 8 & 10, and I think my kids have a better financial grasp than most adults. Things they have learned: Put money in bank to earn interest while not using it. Dollars stretch farther when you shop sales or buy used. If they *Really* want something, we don't have to be that bad guys that say no. We just say, "You can pay for that" and they figure it out. Invest dollars you don't need for 10+ years.

I think it's important to learn these lessons young so you already have money management sense when you begin to earn money. I think waiting until a child is 16 or something like that is way too late. Many missed opportunities to learn, by that point, and then they are starting out at a disadvantage.

Loans: My parents told me this. Never borrow money for anything. The End. My spouse and I both had credit cards at 16 and got in the habit of paying off monthly. Neither of us have been the types to learn the hard way but these were low limit cards if we needed a harder lesson. As is, we have never borrowed a cent for anything but our mortgage (& only that because we live in California). I was actually shocked to eventually learn my parents had bought a new car with a loan (when I was like 5?) and that they once carried credit card debt. I think because they were so past that by the time I was 16 and we talked about how bad debt was. They were also not the extreme like "never carry a credit card or use debt to your advantage" types. Lord knows we have used debt to our advantage at times. (Generally 0% loans or credit card rewards).

Just to say I think you can teach good debt habits versus bad debits without resorting to loans. I'd think loans would be confusing as you are offering them as an option. It's just the polar opposite of my experience. & I know it's been easy to stay out of debt with the way we were wired. Our inclination is always to just seek out other non-debt options. But I do think other personalities might need to learn another way - so curious how others chime in.

[Joan.of.the.Arch]

You kids will have plenty of opportunities to learn about borrowing and lending apart from money loans. That will give them something to hang the idea on. "May I borrow your pencil?" "I'll lend you my bike if you wash it when you bring it back." They'll naturally get the idea that they have to return borrowed things.

You could turn the arrangement around. Why don't you consider occasionally borrowing small amounts of money from your children, instead of making loans to them. "Maddy, may I borrow $10 from you? I don't have time to get to the bank before the game but we need gas in the car to get there. I'll give you back $11 after the game if you give lend me the $10 on the way there."

Personally though, we would not charge interest within the family, and our child grew up with a good head on his shoulders regarding money. We did talk to him about money all the time though.

Hamchan's story---

[LivingAlmostLarge]

I don't get what to do, but we are I think loans are a bad idea. At age 4 I think just learning the concept of delayed gratification is important. And it's the most important lesson for the future.

[Gailete]

Right after my son graduated HS he had an opportunity to buy a good used vehicle but didn't have the cash and I did. I loaned him the money with interest. Set up an amortization schedule and posted it on the fridge. He paid it off with no trouble. It was more than a lesson about money, it was a lesson about trust and love.

I had raised both kids frugally. The older kid tends to spend more freely while the younger one is very careful with his money and read all the finance books that I have around the house. He is a Dave Ramsey fan and it certainly helps him think through issues.

We never gave an allowance since we couldn't afford it. Chores around the house were done with no pay because that is part of being a family and living in a home. Once you start paying for every little thing a kids does then they will continue to expect it. My kids learned very young not to throw tantrums in stores or beg me to buy them candy and gum. Instead they knew that if they were quiet and well behaved, occasionally I would buy them a treat. So while all the other kids at the grocery store were whining, they organized the gum and lifesaver racks at checkout. One of those kids is still organizing the frozen food section at that store as he works there now.

[ideasonfinancing]

This is a good idea. I did not learn most of my abilities to manage my expenses in school. Mostly, I got them through experience and through online research. It will really be an advantage if it will come from the parent considering that you can also impart the attitude that you want your kids to have over their finances.