Saving your kids from the debt trap
Save kids from the debt trap by Jolandie Strydom, Young Entrepreneurs
Becoming a money-smart family starts with developing healthy financial habits and then modelling them for your kids. Over the next few months, I will be sharing the 10 Healthy Habits of Financial Management, starting with the first two most important habits. I’ll divide them into the habits you should apply, and then what you can do to teach your child to do the same.
MOM & DAD:
- Take some time to calculate your NET WORTH. Net worth is everything you own, less everything you owe. Is this moving in the right direction do you think? Are your assets growing and your debt shrinking? For example: Are you paying off your credit card on a monthly basis? Are you paying off more than your minimum monthly bond repayment in order to pay off the bond faster and thus reducing your total debt?
- Have a clear plan in place for the money that flows into the household or your bank account. Make sure it works for you for the long term, i.e. that it grows (savings and investing).
- Know what your overhead expenses are (monthly bills that must be paid) vs Discretionary spending (lifestyle choices that are more wants than needs).
YOUR CHILD:
- Get him/her to count and keep track of their pocket money that they earned.
- Show your child the household expenses like the monthly water and electricity bills to teach him/her that daily living comes with certain expenses that cannot be ignored. Explain how only once these are paid, can you consider buying things that aren’t necessary, but that you would like to have.
- Teach your child to also have a clear plan for his/her money and introduce goals early in life.
Suggested for you:
Healthy habit 2: Live within your means
MOM & DAD:
Do not spend more than you make. If you are spending less than you earn you will have a POSITIVE CASH FLOW. If you are spending more than you earn you have a NEGATIVE CASH FLOW. Most people deal with negative cash flow by using credit (short terms loans or credit cards) to cover their monthly cash shortfalls. Please note that this is a vicious cycle and not sustainable! Most people that fall into the debt trap struggle for years to pay back the interest.
YOUR CHILD:
This habit is very important for your kids to understand from an early age.
Introduce a system where if the child wants a toy that costs more than what he currently has in his account, you can lend your child the shortfall and teach him how he can pay the loan back over a few months. Start with an interest-free loan over three or six months and as the child gets older, you can introduce interest on the loan amounts.
However, offer the loan with caution: Children who are supplemented too quickly by their parents tend to struggle to live within their means as adults. If your child does not have enough pocket money saved away to buy a game or new toy, then try not to supplement the shortfall too easily. Let your child rather do an extra few chores around the house to EARN that money.
Make sure your child gets introduced to the concept of loans and interest as soon as possible in order for them to make more informed decisions later in life.
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