I don’t know about you, but I didn’t learn about debt until I was 21 and knee deep in it! Even worse, I didn’t have the urgency to pay it off until I was 28 and ready to do more with my money.
Many of us grew up in tight financial situations where debt seemed inevitable and paying it back, impossible. But we now have the opportunity to frame the mindset of younger generations toward debt. So if we’re serious about breaking the “owe money” cycle, here are 5 lessons we can teach our kids about debt.
Lesson #1: You can’t afford it if you have to make payments
It’s so easy to swipe that credit card or get that loan, that many of us think we’re affording, when we’re really borrowing.
We borrowed for that car we’ll have to pay on for 6 years, even though it loses it’s value significantly after 1! We borrowed for that house with a mortgage payment that’s almost half our monthly income. We even borrowed for clothes, groceries, and anything else where credits cards were accepted. And with all of this borrowing, we lose money each month because of the interest lenders collect.
We shouldn’t do so much borrowing for items that end up costing more money in the future (like a car), or for items that don’t give us a return (like anything that’s not an income-generating asset).
Lesson #2: The minimum monthly payment is your enemy
Borrowing costs money. That’s what interest is, the cost of borrowing. Each month that you owe, the lender collects this interest. It’s how they make money. To maximize their profit, they break your total debt into monthly payments. It’s NOT so that you can “afford” it, it’s so they can make as much as possible in interest.
Here’s an example: You buy a pair of shoes on your credit card for $400. Let’s assume your credit card has an annual interest rate of 12%. Using a simple debt calculator, you’ll see that your minimum monthly payment is $16, and that it will take 2 years and 8 months to pay it off (assuming you don’t make other purchases).
This means after 2 ½ years, you would’ve paid over $500 for shoes that you probably don’t even wear anymore. And even if you still wear them, they’re likely worth less than $50, let alone the $400 the store asked for!
We should feel a sense of urgency to pay our debt as quickly as possible. This money can then be put toward items that will help us create wealth in the future.
Lesson #3: Once you’re in debt, forget the past…
Some of us fell into debt when we were younger or just didn’t know about its implications, but we have to let it go. Even if you knew better, let go of that regret. Don’t condemn yourself for decisions you made in the past. It only makes it that much harder to take action and break free in the present.
How you got into debt doesn’t matter. What matters is your plan for getting out.
Lesson #4: …& persevere toward the future
No debt is too large to fight your way out of. Seriously, google “how I got out of debt” and look at all of the success stories. Here’s one of my favs.
Nothing is stopping you from being your own success story!
How do you get out of debt? You do whatever it takes to pay more than that minimum monthly payment we talked about above. You get the second job, you cut back your spending, get rid of seem expenses, and you promise to pay that extra amount each month.
And hold yourself to it! You can use a debt calculator to see how long it will take you to pay off your loan with this new, higher monthly payment. Once you have that date, post it to your mirror, make a countdown, encourage yourself to stick to your plan!
Lesson #5 Make it so you don’t have to borrow again
With all of the work, effort, and sacrifice it takes to get out of debt, set yourself up so that you don’t fall back into it. Spend frugally, set financial goals, so that you can save for things our society has told you you have to borrow for. You don’t have to borrow for a car, you don’t have to borrow for a house. You don’t have to borrow for school. Together, saving and going for less expensive items can limit or completely eliminate the amount you have to borrow.
Strive to not have to borrow. That is our lesson for our kids! 🙂