I’m very fortunate to have two loving parents who gave me more than I needed to succeed. They cared and provided for me both physically and emotionally, so this is not a condemnation on them by any means. Also, I don’t want anyone to think that I’m hung up on things that happened 20-30+ years ago. I am not. I own every step I’ve taken on my path.
What this is, is an honest look at some of the things that I wish I would have understood earlier in life. “What my parents didn’t tell me” is a catcher label than “Things I wish I learned sooner”. It also has the bonus of taking us back to when we were children, and still forming our understanding of the world and the way it worked.
My Debt Story
So what is it that I wish I had learned sooner? For me, it would be Credit and Debt. If you borrow money, you need to repay it. It seems so obvious now that it is almost ridiculous to write it out. And yet, I didn’t do it when it mattered. I also didn’t realize the severe ramifications of not repaying my debt, or maybe more critically, of not paying it back on time.
Specifically, I’m talking about credit cards. I got my first credit cards when I was living on my own around age 18 or 19. At first, I didn’t use them much; they were for emergencies, right? But then I did…for everything. They are so convenient, and who has cash on them anyways? Big or small purchases, it didn’t matter; and since my savings balance didn’t move, it felt like free money. But then the minimum payments started getting higher, and I thought, “Maybe I’ll pay this one a little late. Is MasterCard going to struggle if they don’t get my minimum payment on time?” You see where this is going.
What I Didn’t Know
I didn’t realize what I was doing to my credit score.
It’s crazy, right? How is it possible that I got thousands of dollars in credit without anyone sitting me down to say, hey this is how this whole system works. No one told me what a late payment would mean, or more accurately what lots of late payments would mean. If I’m honest with myself, if someone said “Hey Clif, you know you are not going to be able to get a car loan when you are done school, because you are paying your credit card bills late” I would have said, “I’ll walk”. But the fact remains, I was given a credit card without anyone telling me:
- A $2 pack of gum bought with a credit card will cost you $50 when you only pay the minimums,
- Paying on time is just as important as paying your bills at all, or
- Defaulting on a credit card could keep you from buying a car, a house and in some instances from getting a job.
What Will I Teach My Kids
So what does that mean now? Well, for one, I plan to explain the credit system to my children before they are living on their own. I will teach them how purchases on credit card are a loan. I will teach them that paying your bills is just as important as WHEN you pay them. They will learn that their credit history starts from their first bills to their last credit payment. And that information will be used to determine interest rates and creditworthiness for the rest of their lives (or seven years, which seems like a lifetime when you are in your twenties). But more important than any of that, I want to get my children into the habit of paying back.
Lend Your Kids Money
I believe the one thing that would have changed my actions as an adult, even more than understanding the system, is if I had developed the habit of paying loans back. I didn’t owe anyone anything until I got my first credit card bill and student loan, both when I was about 18 years old. When I started borrowing, I was not used to paying anyone back. And it was easy for me to think, no need to pay this back now.
Some people would never consider paying a bill back late. They are born with that sense of urgency when in debt, unfortunately I was not one of them. I want to build that sense of urgency into my children. I need to create repayment habits in my children through actions. And the only way to make that habit is to lend my kids money!
That’s right; I want you to lend money to your kids too. I’m sure I’ll get some push back on this. “Advances on allowances will mess with the concept of saving.” I respect that, but I think just like there are times you use credit to get something now rather than waiting, the concept of credit and debt is something you should incorporate into your child’s money practice.
Lending in Practice
Here is what I have done. If I go out with my son to buy something with his allowance, I do my best to set the expectation that the item he wants to buy will be purchased only with his money. He should be going to to the store with all the money to buy the item, but it will happen from time to time that something else catches his eye that is more expensive, or he forgot the tax (I make sure he pays the tax).
In those instances, I tell him I will lend him the money, but as soon as he gets his allowance, or whenever he gets money the first thing he needs to do is pay me back. I take the receipt from his purchase, write an IOU on the back, and have him sign it. I will not lend out more than one week’s allowance since my objective is not to get him into debt trouble. That is his credit limit.
Here is how it played out the first time I did this. I lent my son an extra $4 a few weeks ago. Right before his allowance, he was given $5 for his birthday from Papa. I will not lie; I felt conflicted telling him that he had to pay me back using his birthday money, and I will also let you know there were tears when he paid me back. But I believe a lesson was learned. And I plan on lending to him again in the future.
How are you teaching about Debt and Credit
Debt and credit are big on my personal finance curriculum. I would love to know if you have any other ideas on how to teach our kids about this important concept. Also, I want to make “What my parents didn’t teach me about personal finance” into a series. I would love to interview you, yes you, the one reading this, to hear your finance journey. You can remain anonymous, but I think we all have important stories to share. Let me help you share yours. If you are interested reach out to me: firstname.lastname@example.org
Lastly, a lot of this post assumes that you have a good handle on how credit cards and the credit system works. If you don’t, I would strongly urge you to read up on them. I will go into more detail on credit cards in future posts, but if you feel like you need something now, email me and I will send you some resources.