As of December 2014, the average U.S. household owes over $15,000 in credit card debt. That figure only applies to those debts which have actually been reported to collection agencies. The average U.S. household that is not indebted actually owes over $7,200 on their credit card. This doesn’t even touch on the $155,000 in mortgage debt or the $32,000 in student loan debt owed by the average U.S. household. Altogether, Americans owe well over $11 TRILLION dollars in debt.
Holy shiz, Batman — that’s a whole lotta debt!
Debt is a huge problem that causes lots of other problems. It is a major stressor in many people’s lives. This debt stress can lead to physical health problems, such as migraines, ulcers, and heart attacks. It can cause mental health problems such as insomnia, concentration difficulties, anxiety, panic attacks, depression, alcoholism, and drug addiction. It can also cause relationship problems. In fact, arguing over finances is cited as a top reason that married couples file for divorce. Debt also impacts our children and research suggests that children who live in indebted households are more likely to end up repeating that cycle as adults.
I, for one, don’t want this to be the case for the future generations. I definitely don’t want my son to be caught up in these statistics. I know firsthand how stressful it can be to have debt. Personally, I never fell into the trap that is the credit card system. Using a credit card felt like spending money that I didn’t have and that didn’t seem too smart.
Unfortunately, I didn’t have this sensibility when it came to taking out a student loan. I attended undergrad on a full scholarship, only having to take out a small loan during the summer that I panicked about entering the real world and decided to tack on a double major the year I was scheduled to graduate. (In order to graduate the following year, I would have to take three courses over the summer and my scholarship did not cover summer courses.) However, for graduate school (which took me nearly a full four years to complete as a single mom), I didn’t apply for any scholarships, even though I qualified for several (yeah, smart move). I took the “easy way out” by taking out student loans. That was a decision that I wish I could go back and redo every single time I get a loan repayment reminder in the mail. This stress is another thing that I hope to help my son avoid, so I have set up a 529 savings account for him — but that's a topic for another day.
What can we do to ensure that the future generations don’t get trapped in this horrible debt cycle in which many of us currently live? In my opinion, one step that we can take is to begin teaching financial literacy to our children.
By teaching our children money management skills, we are helping to ensure that they grow into adults who are fully equipped to make smart financial decisions. The sooner we begin, the better. This is a process that we can begin even with very young children, so don’t make the mistake of thinking that you should wait until they are teenagers to get started.
In fact, I have already started with my son and he is only four years old. At this stage, there are four life lessons that I am working on teaching him:
Things Cost Money
The things that we need (such as housing, food, and clothes) as well as the things that we want (such as Hot Wheels, cool Kindle apps, and Paw Patrol DVDs) all cost money.
Money is Earned
Despite being made of paper, money does not grow on trees. We have to earn money — usually by providing a service or offering a product.
Instant Gratification Is Not Ideal
You can’t always have everything that you want right away. Sometimes you have to wait until you can afford it. Rather than looking at this as a negative thing, look at it as a way to appreciate what you do have even more.
Want ≠ Need
Not everything that we want to have is something that we need. It is important that we can differentiate between the two and that we prioritize our spending based on that. Handle your needs first and then you can take care of the things that you want.
These lessons will become more complex as he gets older. Other lessons that children and teenagers need to learn include (but are not limited to):
A Penny Saved is a Penny Earned
Saving some money every time you earn some is a great practice for everyone to implement. There is no need to spend all of your money at once. As they say, “Don’t spend it all in one place.” It is a great practice to set aside a certain percentage of your income from every paycheck before you spend any of it and then never touch that money except for its intended purpose.
Be Careful What You Share Online
The internet is full of shady people ready to steal from you, so be careful about what you share online — especially when it comes to private information. This also means using secured connections when you are handling your finances online and being wary of things that are likely to be scams.
Don’t Borrow More Than You Can Pay Back
Credit cards are not free money. They are loans that you have to pay back. Treat them as a backup option and be careful not to spend more than you can pay back in a reasonable amount of time.
Three Is The Magic Number
It is smart to save enough to survive for three months. You never know what will happen with work, family, or health. If you have enough saved up to be able to last for three months, that gives you time to make plans for how you will improve your situation. You may have to cut down on some of your living expenses should a situation like this occur, but it is still highly beneficial knowing that you have a cushion. Not everyone does.
Your Budget Is Your BFF
You should always know how much income you have coming in and how much you will have to pay out in regular expenses. If you don’t know these things, you are setting yourself up for potentially huge problems. Being aware of your monthly income and expenses helps you to map out how you will spend your money in the wisest way possible.
Prepare For the Worst, But Hope For the Best
Insurance is usually well worth the investment. You never know what life will throw your way. People lose their jobs every day. They get into accidents that cause them to not be able to work for a while. They have medical emergencies that cost more than they have in the bank. Their cars break down and they need to fix them so that they can get back and forth to work. Their prescription glasses break. It is often worth it to invest in medical, life, health, home, and car insurance.
Sure, you always hope that you will never need to utilize that insurance and many people might erroneously feel that it is a waste of money if you never do. However, the alternative is that you do need the money from an insurance policy, but can’t access it because you didn’t make that investment. It is much better to be prepared and not need it, than to need it yet be unprepared. In line with this lesson, they should know that it is okay (and highly recommended) that they shop around rather than buying the first policy that is offered to them.
If you are not sure about how you can begin teaching your child financial literacy, here are some resources that I recommend:
Mint — This page offers a long list of additional resources that you can use to teach your children how to be money savvy.
Money As You Grow — This website introduces 20 things that kids need to know to live financially smart lives and offers activities that you can implement for each one. It breaks it down by age groups, making it really handy to figure out where to start.
The Mint — This site offers tons of fun financial literacy activities and tips for kids and teens.
U.S. Mint — Visit this site for activities and lesson plans centered on financial literacy for children from kindergarten through 12 grade.