Teaching Financial Responsibility to Kids Before It’s Too Late

by Gary Foreman

One of the best money gifts you can give your kid is to teach them financial responsibility so they don’t grow up to be a money-dumb adult. Here’s a look into their possible bleak financial future if you don’t.

Gary,
How can I get my daughter to learn the importance of savings and managing her money? My teenage daughter, in spite of my trying, doesn’t want to know. She earns more than enough to pay her bills, but she is always broke and has trouble making payments. She doesn’t know where the money goes.

How can I reach her before she is trapped in the credit crunch?
Bill

Kids Need To Learn Financial Responsibility Now More Than Ever

Bill is right to be concerned about his daughter. With today’s soaring college costs, it is estimated that the 2023 high school graduates going on to college that take out student loans will borrow an average of $37,300 for their bachelor’s degree. (source: nerdwallet.com.)

There is one simple fact that most people ignore about debt. When you borrow money, you must pay it back plus interest owed. So if our average student owes $37,300 and is charged 5% interest, it will cost them $363 per month for 10 years to repay.

Or look at it another way. At $20 per hour, Bill’s daughter (we’ll call her Cindy) would have to work 217 hours per year over 10 years enriching her creditors. Probably not an easy feat for a young adult who has not developed good money habits.

But, here’s the kicker. If instead Cindy could save that $4,350 every year for those ten years (say in an IRA), and earned the same 5% on the money (although she could earn closer to 10%, the average stock market return for the last century), she would have over $56,000.

A Glimpse Into the Financial Future of a Financially Irresponsible Young Adult

it sounds as if Bill knows what he needs to teach his daughter about money. The challenge is getting through to her. Perhaps a glimpse into her possible financial future if she doesn’t become financially responsible could help open her eyes.

Bill can show Cindy that being in debt is like having financial cancer.

At first, it only hurts a little. The “monthly minimums” don’t seem so bad. And you can brag that you’re borrowing at low introductory rates and building a credit history. But, the total balance and the minimums are likely to keep increasing. By the time Cindy graduates from college, she’ll have over $1,500 in credit card debts if she’s a typical student.

Even if she is one of the 50% who do not graduate in student loan debt, she could still be in for a financially bumpy ride is she isn’t prepared.

The next big move is when she finances a car. The salesperson is helpful. They make the payments very affordable by stretching out the life of the loan. And she doesn’t intend to keep the car for five years anyway. So she figures she’ll never have to make those last payments. And besides, her best friend just bought a new car so it only seemed fair.

Things seem to be going along ok. Her balances increase, but she’s able to afford the minimum payments. The credit card companies must like her because every time she approaches her credit limit, they increase it.

Then one day there’s a problem. She looks at her credit card statement and they’ve boosted her interest rate to 18%. They say it’s because her last payment was late.

She can still make the minimums, but the higher interest rate caused her balance to grow each month. Cindy thought about cutting her spending, but somehow just couldn’t stick with it.

After awhile, she decided that the best thing was to get out of those car payments. She really wasn’t that happy with the car anyway. And a different car with lower payments would leave more money at the end of the month for the credit cards.

But despite the ads, it wasn’t as easy as she expected. She owed more on her car than it was worth. Remember those last few years of car payments that she didn’t think she’d have to make? Well, she either had to make all of them now at trade-in or be prepared to add the amount still owed to the new car loan.

That’s when Cindy realized that she was probably stuck in her old car and her old car payment. It was impossible to get a car she’d like with a lower payment unless she agreed to six years or more of payments. Ouch!

Trapped in Debt

At this point, she’s trapped in debt. Each year more of her time is spent working just to pay her interest charges. And unless she makes serious cutbacks on her spending, she’ll always remain in debt.

Worse than that, it won’t take much for her to fall behind in her bills. A temporary job loss, short illness or major auto repair could trigger a crisis. And once she starts falling behind, her interest rates will skyrocket at the same time that her credit rating plummets. Generally, the only way out at that point is credit counseling or bankruptcy.

Oh, you’re probably wondering why we called our girl Cindy. Because she’s the anti-Cinderella. Instead of going from rags to riches, she’s managed to turn a promising future into a pumpkin. The way to a happy ending? Get out of debt as soon as you possible can.

Related:

• 5 Steps to Raising a Money-Savvy Teen
• 8 Tips for Raising Money-Dumb Kids
• 13 Things To Teach Your Kids To Make Their Financial Lives Easier
• Have You Grown Up Financially?

Reviewed July 2023

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.