How to Teach Your Kids to Borrow Safely

money in the hands

Today’s teens have grown up in the worst economic climate since the Great Depression, and many have watched parents or friends’ parents lose their jobs, struggle to pay bills, and in some cases, lose their homes. The experience has left them with a leery view of borrowing.

Patricia Seaman, senior director of marketing and communications for the National Endowment for Financial Education, says the 2008 recession has left many teenagers with an incomplete understand of how the economy works.

"The main message is that borrowing gets you in trouble," Seaman says. "It's not a complete picture, but that's what teens have picked up."

While parents can, and should, capitalize on using the tough economic climate to teach solid finance and spending skills, Seaman says implementing smart borrowing practices and concepts should be a priority for all families. News of massive credit card and student loan debt along with foreclosures have clouded the lending picture, and Seaman stresses the importance of  parents showing kids that borrowing money responsibility can help reach goals.

While necessary and appropriate in certain circumstances, borrowing shouldn’t be the first solution presented to teens when facing a dilemma, says personal finance expert Dani Johnson.

"We have been desensitized as a people, generation to generation, about debt," she says. "It wasn't too long ago that people refused to go into debt, even for cars. If they didn't have the cash to pay for it, they didn't buy it, aside from mortgages on a house."

Credit and debit cards being aimed at younger audiences have allowed kids to separate the actual cash they are spending from the items they are buying, according to Johnson. Borrowing becomes almost thoughtless, and if parents don't teach their children about making that connection from a young age, they will find themselves in debt later in life, she says.

"Borrowing just seems to be a part of everyone's everyday life, and that will lead into an even further horrifying future financial disaster," Johnson says.

Johnson recommends the first lesson parents need to get across to their children is that working equals cash. Even borrowing something as small as $5 from a friend or parent sets a bad precedent for kids.

"I'd say, 'Go out and find a way to make that money on your own—even if you have to trade or barter,'" she says.

Seaman said tangibility needs to be a main talking point for parents when talking to their kids about money. At the ATM, parents need to stress that they are working hard to make this money, it isn't just being spit out of a machine.

"Show them that cash is always the best way to pay," she says. "I vocalized this with my kids, and showed them the chain [of purchase]."

If parents are going to lend children money, outline repayment terms and consequences if the money is not repaid on time.  "Show them how borrowing among even a peer group has impacts on their relationships," Seaman says. "As they get older, you can translate that relationship into one with a bank."

Showing kids a credit card or mortgage statement can also show how  borrowing can be done smartly and efficiently. Point out how quickly even small purchases can add up, how much the interest rate is, and how long it will take to pay the purchases off.

"Show them payment and interest rate calculators," Seaman advises. "Let them see that schedule and play around with those numbers. Teens are practically adults, and they need to be spoken to that way."