How to Talk to your Kids about Debt

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) March 17, 2010 -- If you are like many parents, you sometimes look at a stack of bills and hope your children will not face the same challenges you do. Or you see friends or relatives struggling with debt, and you wonder how to keep your kids from those problems.

By helping your children understand money and the challenges of debt, you can help them make wise choices later in life. Teaching them how to plan ahead teaches self-control -- a principle that, research has found, pays off in spades. A great example of this principle is the "marshmallow test." Conducted in the early 1960s, with research ongoing today, the study asked 4-year-olds to sit alone in a room with a marshmallow. They could eat the marshmallow immediately, or if they resisted eating the marshmallow until the researcher returned, they could have two marshmallows instead of one. Over the years, research has shown that the children who resisted the longest -- who had the most self-control -- were the most successful later in life.

The study's author, Walter Mischel, has explained why the test is powerfully predictive: "If you can deal with hot emotions, then you can study for the S.A.T. instead of watching television," Mischel says. "And you can save more money for retirement. It's not just about marshmallows."

You can help your kids pass the "marshmallow test" of a lifetime by helping them build self-control when it comes to money and debt. Try these suggestions for talking to your children about these issues.

1. Model responsible choices. If you argue with your spouse about money, or spend like it's going out of style, think about what your choices teach your children. Try new ways to live within your means, starting with simple measures such as bringing along a water bottle instead of buying a fast-food drink, cooking in instead of dining out, or playing catch in the park instead of splurging on a day out. In the process, you might find a chance to talk with your kids, too -- building relationships while building financial well-being.

2. Set a good example. Talk with teens about how you make financial decisions. Don't worry them about whether you can pay the bills, but let them know money does not just flow freely. Sharing the decision-making process of choosing whether to take a week's vacation or buy a plasma television -- or forego both to pay the orthodontist -- can give kids a clear picture for their future.

3. Teach financial responsibility. Do not hand out endless cash. Instead, give children a way to earn money (whether via a job, household chores or other system that works for your family). Provide an allowance -- a "budget" -- for spending on vacation. Help children allocate their money to spending, long- and short-term savings, and charitable contributions. Children age 6 and up are old enough to learn how to handle money. Allow them to make some spending decisions while young so they can learn from their mistakes while the effects are harmless.

4. Encourage working toward long-term goals. This practice will teach delayed gratification -- the skill highlighted in the marshmallow test. If your children want something, talk with them about how the candy bar they buy today slows down their progress toward a new video game. As they grow older, point out that they might not get as much pleasure out of a quick purchase -- like a stack of video games -- as they will get from saving longer for a significant buy, such as their own car.

5. Show the effects of interest. Help children to open a savings account. Explain how compound interest works, and show them how their saved money grows. On the flip side, if they want to borrow money to buy a toy or other item, offer to lend it to them, with interest, but explain the effects. For example, borrowing $200 to purchase a video game system at 10 percent interest, and paying it back over 12 months, results in paying an extra $11, or 5 percent more, for the gadget -- not to mention the burden kids will feel from having to continue paying for something that is no longer a novelty.

6. Have teens participate in the household. Consider delegating a household task -- whether maintaining the lawn mower or their car, or preparing meals -- to teens, with a budget. As part of the household, they are responsible for managing the budget and paying for necessary items or repairs. The chore will give them a sense of additional responsibility, teach money management and prepare them for independent life in a few years.

7. Have teens acquire their first card under your guidance. Until they are 18, they cannot legally enter into a credit card contract, so they will have to be an authorized user on your card. The benefit to this is two-fold. First, they can’t get in over their head and second, it will begin to build their FICO score. Numerous banking institutions, such as Bank of America (http://www.bills.com/bank-of-america-lender-profile), offer information for first time card users and their parents.

When you teach kids about money and debt, you can have a profound effect on their futures. You can encourage them to delay gratification in order to create a more stable future -- and by doing so, teach powerful lessons about how to build a healthy relationship with money and debt.

More information can be found online at http://www.bills.com