Explaining Debt Consolidation to Your Children

Understanding the world of finance can be difficult and confusing. Most of us go through life and pick up on different financial topics as necessity allows. For example, you may have no idea what a home equity line of credit is until you are recommended to open one. So while financial topics can be confusing, to children they can be almost impossible to understand and at times can be downright scary. If you are in debt and have kids, it is likely that your children have at least overheard talk of your debt, and they will be anxious to understand what debt is and how it will affect them. By explaining some key debt principles to your children, you can put their minds at ease and can help them prepare for their financial future.

Teaching Debt Principles to Children

You will want to start by explaining the concept of debt to your children. If you have younger kids, you may need to use object rather than money in order to explain debt. For example, you can simply teach your child that if you borrow a toy from someone else, that toy will need to be returned at some point. With older children, you can use terms that they more be familiar with such as allowance. For example, you could show your child that if they decided to get a forward on their allowance in order to make a big purchase, they would be in debt and would have to pay you their allowance until the debt is repaid.

Teaching About Interest and Consolidation

Once children have the idea of debt, they may be ready to move on to understanding some more complicated ideas like consolidation. If you are trying to teach very young children about consolidation, it may be better to wait a few years until they have enough experience with the concept of money to understand. If you are teaching older children about consolidation, they will have to understand interest first. Loan your child a dollar and tell them that if they take the dollar, they will have to pay back the whole dollar plus ten percent. Your kid should be able to see that they will now owe you $1.10. Then explain that interest will continue to be tacked on until the debt is repaid.

Once a child has a basic understanding of interest, you will be able to continue your consolidation lesson. Set up an example, where your child has borrowed a dollar with a ten percent interest rate from both mom and dad. Then ask your child if it would be better to get a $2 loan from just dad with a five percent interest rate. This may be difficult for your child to understand, but when they understand that they can pay off the original loans with the $2 and then get a smaller interest rate, they will then be able to understand the principle of consolidation. If you have kids that are even older, you may want to take them to the bank, and the tellers should be able to show them around and give them more in depth lessons.

Preparing your child for the future is very important. It is likely that your kid will at some point enter into debt, and explaining debt consolidation to your children can do a lot to help prepare them for the pressure of debt. Teach them these lessons today, and in time your children will turn into financially wise and responsible adults.