What is debt?
When you borrow money to pay for something, it’s called being “in debt.” The financial definition of debt is: Something owed, such as money, goods, or services. Debt can be a burden, but it can also be a valuable tool in the world of finance. Debt can help you buy a home, cover an emergency, and pay for your kid’s college degree.
What is good debt?
When explaining debt to kids, it’s important to show both sides of debt: good and bad. Debt can be a good thing when used responsibly. Debt can even help you build credit and create better financial opportunities in the future. Good debts can increase your net worth and value, making it easier to get a bigger loan. A mortgage, car loan, and student loans for college can all be good debts.
What is bad debt?
However, no debt is good debt if you spend outside your means. Debt can become overwhelming when not managed well or paid on time. Another way to judge if a debt is “bad” is if it doesn’t increase your net worth or value. Avoid spending money with credit on big purchases like expensive clothing, technology gadgets, or the next, greatest thing that will decrease in value over time. Unfortunately, you’ll still have the large payments and interest fees.
Explaining what debt is to kids
Explaining what debt is to kids can feel complicated, but it’s easier to teach when you stick with the basic facts. When one person agrees to let another person borrow money, those borrowed funds become a debt. When someone pays the money they borrow back over time, they pay an extra fee for the ability to borrow the money they needed, called interest. However, the most important lesson to teach kids about debt is that they are responsible for paying the money they borrow back. As your child becomes more interested in money, you can use real-life situations or relatable examples to explain ideas about debt in more detail.
Tips for teaching your kid about debt:
- Explain the difference between wants and needs. Is something worth going into debt?
- Don’t let your child borrow money without a system to pay it back. Teach them how to plan for their payments and how to budget money.
- Teach your kid only to take debt they can pay back. Old debt costs more money with interest in the long run and ties up the income they could use for more important things.
Read more articles about explaining credit and money borrowing to kids.