Helping your kids understand borrowing
Borrowing can be a difficult but also important concept for a kid to grasp. Here are our tips to best explain it to kids of all ages.
Borrowing money has become a key point of modern life. From credit cards to home loans, our relationship with borrowing money can be a great resource or a risk. So it's important for children to understand the concept of borrowing from an early age. Here are some helpful ways you can introduce the idea to them.
- At pre-school: A good way to start is to talk about borrowing toys. Explain how borrowing a friend's toy is a nice way of getting something extra for a while but that it is their friend’s toy so they will need to return it back to them at the end of play. Often easier said than done!
- At primary school: Once your child has started school you can start linking 'borrowing' to money. This should start very small. Perhaps you're at the shops and they want something but have left their pocket money at home. You can lend them a small amount of money, say $2, but make sure they understand that they will need to repay you as soon as they get home. I used to get my children to write me an "IOU" which acted as a physical reminder.
When your children are a bit older you can also explain how people can borrow money from a bank, but that it costs money – you need to pay back the money plus extra, in the form of interest. So you end up paying more for the item than you would if you were to buy it outright with your savings.
- At high school: I believe that saving for more expensive items should always be encouraged however we all know sometimes our teenagers can be impatient to get the latest gaming console or in-season clothing! If you do assist them with a purchase, it should be with the promise of them paying you back. I found that making sure they understand how the repayment will work upfront helps smooth over any troubles come time to repay. Keeping a visual tracker on the fridge or otherwise is a good way to tally their repayments and to help avoid misunderstandings.
Overall, I believe the more realistic the process, the better prepared they will be when it comes to borrowing money in the real world.
For related posts and downloadable activity sheets about financial literacy for kids, visit The Beanstalk.