How to teach kids about loans and debt

When should you teach kids about finances?

How to teach kids about loans and debt


By Ryan Johnson

An internationally acclaimed children’s author has urged parents to carefully consider how they approach discussing loans with their kids, saying they should instil a savings mindset at an early age.

In a society marked by rampant consumerism and easy access to credit, delayed gratification emerges as a powerful tool for instilling financial discipline in young minds, according to Will Rainey (pictured above), author of children’s book Grandpa’s Fortune Fables and family finance blog Blue Tree Savings.

“Parents - please don’t give your kids a loan. For example, ‘I’ll buy this for you now, but you won’t get any allowance for three weeks’,” said Rainey, who is also an investment consultant.

“Making them wait teaches them to save. We live in a world where so many people are in debt as they want things right now. We need to make sure our kids don’t fall into the same trap.”

When should you teach kids about finances?

Aussies have some of the highest debt levels in the world.

The average Australian household had a debt of $261,492 as of December 2022, according to the most recent data form the Australian Bureau of Statistics (ABS). This is equivalent to a national total of $2.66 trillion in household debt, based on the number of households the ABS included in the data.

With many adults suffering from financial stress due to overspending and overleveraging, Rainey said we live in a world where spending and borrowing money is easier than ever before.

For some, however, the current levels of debt don’t necessarily mean we should begin warning the next generation.

A popular argument to avoiding these discussions is to just let kids be kids. Preserving childhood innocence by avoiding these stress-inducing adult discussions may seem like a logical course of action.

These complex financial concepts could be too much for a growing mind, leading to disengagement and confusion.

However, Rainey argues that kids form most of their financial habits by the age of seven and teaching children about money from an early age is one of the “most important things to consider”.

“Together with social media, there is greater social and marketing pressure to spend. If we don’t teach kids how to save, they could easily end up spending most of their money and driving more people to suffer from financial stress in the future,” Rainey said.

“This is why it is so important to teach kids to save their money and delay their gratification.”

By teaching kids to delay their gratification, Rainey said they would be learning how to save and budget their money.

“These are essential skills needed before they are in a position to borrow money for a house or maybe a car – although for most people they could save money to buy a modest car with cash.”

The difference between good and bad debt

This leads to the next point of discussion: is all debt bad? Of course not, said Rainey.

According to Finder, these are Australians’ average debt levels in December 2022:

  • Home loan debt: $610,286
  • Credit card debt: $3,026
  • Personal loan debt: $6,920
  • Car loan debt: $11,370
  • Student debt: $24,800

A mortgage typically makes up the biggest portion of average Australian household debt.

According to a Domain report, Australia’s median house price is back at its peak of $1,084,855. Regional house prices have also hit a peak of $591,139.

While saving $30,000 for a 5% deposit may be achievable for some, homebuyers will become borrowers in the vast majority of cases.

“For my kids, we have talked about having money saved and invested so their wealth grows over time. If they spend their money or borrow money to spend, then their wealth won’t be growing,” Rainey said. “That being said, I have talked to them about debt and explained to them that some debt can be used to grow their wealth.

“For example, if they borrow money to buy a house then the house is expected to increase in value so they will hopefully become wealthier over time.”

The same could be said for student loans (as education could be expected to help them earn more) and business loans. This means some of the money they save when they are adults will have to be used to repay this borrowing.

But personal loans, car loans, and credit cards also contribute to personal debt levels in Australia.

These could be considered bad debt and can hurt your finances in two ways. First, it puts your wealth at risk over time through high interest rates. Second, it could be a sign you’re spending beyond your means on things you can’t actually afford. Remember, any debt can turn bad if you can’t make the payments.

“Sadly, a lot of parents believe that we now live in a world where using credit cards and loans is something our kids will need so we need to teach them how to use them responsibly,” Rainey said. “I feel we should avoid this mindset.”

“Personally, I believe that the focus should be on helping kids learn to build their wealth. This means teaching them to save and invest. If we give kids loans, it means they are spending more than they have. Basically, their wealth is declining rather than growing.”

Should you loan your kid pocket money?

Rainey said the only time that he has loaned one of his children money was when they wanted to buy something now (as it would be hard to purchase later) and had money coming in shortly (birthday money).

“They didn’t want to take their money out of their savings or investment account,” he said.  “Essentially, they had a short-term cashflow issue so I provided a loan and charged them a high interest so they learn from this.

“If they don’t learn the skills of saving and delayed gratification, and see borrowing to spend as the norm, then it could be hard for them to save up enough money to reach their financial goals, including a downpayment on a home, which is becoming increasingly harder.” 

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