Wednesday 24th July 2024

A parent’s guide to teaching children about debt 

Tolu Frimpong discusses the importance of teaching children about debt early, providing essential tips for parents on financial education

A woman reads to a group of children. Teaching children about debt

Teaching children about debt is a tricky topic. In today’s financial climate, it is crucial that children understand money management from a young age. In the UK, many parents recognise this and are taking steps to educate their children about financial matters. 

Research indicates that financial habits form early in life, with many children developing their attitudes towards money by age seven. This early development highlights the importance of parental involvement in teaching financial literacy.

A Money and Pensions Service study found that 81% of children aged 7-17 learn about money management at home, demonstrating the pivotal role parents play in this aspect of their children’s education​. 

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Understanding debt is an essential life skill. By teaching children about debt early, they can make informed financial decisions and be better prepared for managing their finances as adults. This blog provides useful tips to help you teach your kids about debt. 

More from Tolu Frimpong on Mouthy Money

Understanding the basics  

What is debt? 

It’s important for parents to explain to children that debt is money borrowed that must be paid back within a specified time period, and oftentimes with interest.

To make it easy for children to grasp, use simple examples, like borrowing money from a friend to buy a toy and repaying more than the borrowed amount due to interest. 

The different types of debt 

Introduce the concept of good debt versus bad debt. Good debt includes investments that provide long-term benefits, such as a mortgage for a home or a loan for education.

Bad debt, on the other hand, is money borrowed for non-essential items, like the latest gadgets or trendy clothes, which can lead to financial trouble. 

Understanding interest 

It’s important to help children understand how interest works by speaking to them in a language that they understand.

For example, explain that if you borrow £100 from your friend with a 10% interest rate to buy a new bike, you will need to repay £110. You could also use visual aids like charts to show how interest accumulates over time. 

Creating a budget 

When trying to educate children about debt, introduce them to budgeting, a fundamental money management tool that can potentially help them avoid the pitfall of debt in the future.

Explain that budgeting involves planning how to allocate money wisely to avoid overspending and falling into debt. Use simple examples, such as managing their pocket money or planning a budget for a small event, to illustrate the concept.  

Needs vs wants 

It’s also essential to help children understand the difference between needs and wants. Yes, they may need trainers for P.E. but do they need the latest Air Jordan 4’s?

Discuss the difference between essential needs and discretionary wants and help the children understand that borrowing should be reserved for necessary expenses, such as education or shelter, rather than impulsive purchases like the latest gadgets or fashion items.  

Modelling responsible financial behaviour 

Parents have the responsibility to model the behaviour they want their children to grow up and adopt. Therefore show your children how you manage your debts and make timely payments.

Discuss your financial decisions openly and explain the reasons behind them. Having this level of transparency with your children will help children understand the consequences of borrowing and the importance of maintaining a good credit history. 

Practical tips for teaching children about debt

Choose the right time 

Pick a time when your children are alert and attentive, such as after a meal or during a relaxed weekend afternoon, to discuss debt.

Avoid times when they are tired or hungry, as they are less likely to be receptive to new information during these times. 

Open lines of communication 

It’s important to create an environment where children feel comfortable asking questions about debt and personal finance, so please be patient with them and provide clear, honest explanations.

Encourage them to express their thoughts and concerns, and address any misconceptions they might have. 

Be honest about your experiences 

Finally, share your own experiences with debt, including any challenges you faced.Doing this will help children understand that everyone makes mistakes and learns from them, humanising the topic and making it more relatable.

Your openness can demystify financial struggles and teach valuable lessons about resilience and financial recovery. 

Photo credits: Pexels

Tolu Frimpong

Mouthy Blogger

Tolu is a Money Coach and Content Creator, passionate about helping others break the payday-to-payday cycle and achieve their financial goals, through the power of intentional budgeting, saving and investing. When she’s not talking about money you can find her spending time with her 3 boisterous boys.

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