5 Ways to Keep Your Kids From Going Into Debt
I hear it all the time from parents. They say, "I wish I knew this stuff when I was younger."
They sit in on one of my talks to young adults and teens, or they listen to my what my dad, Dave Ramsey, says about managing money, and they realize just how much time and money they’ve wasted by trying to just get by.
In our culture, debt is normal. That’s why our goal is to be weird – at least in the way we handle our money! And as your child grows up and becomes a teenager, college student and young adult, you have the opportunity to teach them the right ways to handle money now.
What principles should you teach them?
• Live on less than you make. This is so simple. It’s just common sense. But it’s amazing how many grown adults spend more and take on more debt than they can afford. Their outgo is much more than their income, which means they go further and further into the red every month. That’s no way to live. But that’s what a lot of 18-year-olds are headed for when they start signing up for credit cards the moment they step on campus. As a parent, it’s your job to teach your kids the power of the budget.
• Don’t buy stuff you can’t afford. It’s all about contentment – being thankful for what you have. A lot of young adults get into debt because they are trying to keep pace with the lifestyle their parents live. But it took their parents 20 years to get to that point! If you make it a point to stress patience and contentment to your kid at an early age, you’re giving them a great start.
• Don’t worship the credit score. You might also know it as your FICO score, and here’s the thing about it: The FICO score is an "I love debt" score. All it does is measure how much debt you have, how long you’ve been in debt, and things like that. You can be a billionaire, pay for everything in cash and have a zero credit score. A good credit score is not an indicator of winning with money. It just means you know how to manage your debt well.
• Save for emergencies. The one thing you can be sure of about emergencies … they’re coming! It might be a new transmission or a broken foot or a lost textbook, but emergencies are going to happen. You can count on it. That’s why an emergency fund is so important. When your son or daughter heads off to college, they need at least $500 in the bank for emergencies only. In other words, not for pizza! This will help them deal with emergencies without pulling out a plastic card.
• Invest and save for college. It might be a little while before your kid is worried about 401(k)s and mutual funds. But you can model a healthy financial life for them by saving for your own retirement and making sure their college savings are covered. When they don’t have to stop by the financial aid office to pick up a check, that whole saving thing will start to click.
These are just the basics. The older your child gets, the more in-depth you should be able to get. Remember, the best way to teach is to live this out yourself. If you’re slapping down a credit card while telling them debt is a bad idea, you can’t expect them to really believe what you’re teaching.
Don’t let your kid be someone who is sitting in an audience 30 years from now and saying, "I wish I knew this stuff when I was younger."
Starting today, help them prepare for their future by teaching these basic principles. Debt is normal. Be weird.
Rachel Cruze learned the basic principles of money at an early age. She travels across the country teaching those same principles, in a personal and passionate message of money and hope, to teens and young adults. To find out more about Rachel, visit daveramsey.com/speakers or follow her on Twitter at @RachelCruze.