10 things we wish our parents told us about debt
Some of the Debtfix Crew are old enough to remember taking a few coins along to school and handing them over with our bank book and a deposit slip to slowly build up a wee nest egg. We learnt about saving for a rainy day, earning interest on our meagre bank balance and maybe we got into the culture of New Zealand’s banking system.
However, no one talked to us about debt.
Now is the time to start an on-going conversation with the tamariki about debt, maybe even give them some fun experiences with borrowing and repaying. Here are some things we think adults could have shared with us to improve our understanding of debt and some exercises to help kids and teenagers get money smart.
Don’t just make the minimum payment for your credit card account
Many of our parents never had credit cards so they didn’t know how the system worked. If they had, our frugal grownups may have worked out the minimum payment was a losing situation. The compounding interest rate is high, and the total amount of outstanding debt grows faster than you will ever pay it off if you only make the minimum payments and continue to shop.
For the kids: Get some Lego bricks or anything you can stack up to represent money. Play a game, selling them something, such as, a phone or toy but they don’t have to pay anything. They use a credit card. Then create three equal piles of bricks that represent the total original debt. The next day, present them with a statement that gives them three options, pay off all the amount, some of the amount or a minimum payment. Show them how each option impacts on the pile of bricks (debt) as the days go by. If they pay it all off – the pile is completely removed. If they make a partial payment, take away some of the bricks but add back a few back to represent interest. If they only make the minimum payment don’t take away any of the bricks but add on some more for interest.
Negotiate a better price instead of taking the interest free deal
Many retailers with enticing interest free deals will sell you the item at a discounted price if you pay cash up front. That’s not literally folding bank notes but paying the full price immediately. You’ll save yourself establishment fees and frequently, you can negotiate a discount.
For the kids: Get a couple items that you know your children will really like and pretend to sell them to them. They can use play money, or with older kids, maybe do this for real.
Make them two offers. One is to let them pay off the purchase but take some money off them for the establishment fee. The other option is to let them pay for it all now but at a lower price. Discuss how much money is left after each option.
Aim to pay off debt and put money into a savings account
Paying off your debts should be your priority and you can read more about what debts to pay off first here. However, it’s also a good idea to put a small amount of money aside from each payday into a savings account while you are paying off debt. Even the smallest amount gives you a contingency fund for emergencies and gets you in the habit of saving, rather than shopping on credit. When you have reduced your loans and bills, you can increase the amount of money you save.
For the kids: Children should grow up with pocket money and then you can work with them to create their own budget. Show them how to divide the money between spending, saving, expenses and donating. When they want to buy something they can’t afford and you help them out with a loan, show them to include debt repayments in their budget, while continuing to save.
You can negotiate with lenders
It is possible to discuss options with lenders, both before you arrange a loan and when you are making payments. The terms and conditions and clauses in the loan agreement may be negotiable, which means you don’t have to take add-on insurances, and sometimes you can even make a deal on establishment fees and the interest rate.
If you need to change your payment plan because your income has altered or life has thrown you an unexpected expense, you can also talk to the lender about this.
For the kids: Parents can have some fun with this one, if you can stick to your plan. Lend your children money to buy something that is beyond their budget and establish a repayment plan. If they are struggling to make payments give them an option of renegotiating the repayments or repossess the item. We’ve heard of a parent who lent her daughter money to buy a pair of fancy shoes and the mum took back one shoe until her teenage daughter got back on track with payments. That got some real traction with her daughter.
Your credit score is created from more than loans
Many people think they must borrow money to create a credit history, but your credit score is generated from multiple parts of your financial record. Your power bill, rent repayments, and companies you are affiliated with add to your credit score and you don’t need to get into large loan agreements. A credit score is about reliability, trust, risk, and reputation – all big life lessons for young people.
For the kids: Think about something that is important to the child and give them an opportunity to take responsibility. Maybe they want to borrow something of yours, like the car. Together, plan ways within a certain time frame that they can build a reliability score before they can borrow the car. For example, by the end of the month they need to wash the car, have money for fuel and meet curfew times. When they have achieved these goals, they have achieved their reliability score and are rewarded with the use of the car. If they stop being reliable with the car their score drops and they lose car privileges. Have a conversation about credit scores and how they work the same way.
People have different money personalities
Understanding that people have different money personalities is empowering. Common money personalities are investors, savers, big spenders, debtors, and shoppers and the Sorted website has an insightful money personality quiz that is applicable to New Zealanders. We all have different approaches to money and when we understand our money personality, we can accentuate our strengths and work on our weaknesses. It also helps us understand a partner’s approach to money and why we may have clashes or complement one another.
For the kids: With younger children you can play a game, taking their dolls and teddies shopping. While playing, some toys will buy big ticket items, but others will decide not to. Chat about the differences and the consequences. You can do something similar with older children but use real people who are not family or friends, such as, celebrities, sports stars. Talk about something that person might buy or choose to delay.
Banks are businesses
It is easy to overlook that banks are in the business of making money. Therefore, when we borrow from them, invest with them, or simply operate an everyday savings account the bank needs to make a profit. They charge interest, late payment penalties and operational fees.
For the kids: Get your teenagers to Google bank profit New Zealand and ask them to report back on the bank making the most money.
Your debt is my debt
When people go flatting or progress into a more serious relationship, they often find out the hard way that debt of those around them can become their debt. For example, when they set up a flat and put their name on the power bill, then a flatmate doesn’t contribute their share and leaves. The person who is named on the account is responsible for that debt. It’s the same if they’re in a relationship and enter into loan agreements. If their name is on the agreement, they’re liable for the debt. If the relationships breaks up they need to be aware they can be responsible for the debt of their ex.
For the kids: With siblings or maybe an adult with a child, lend them money to do an activity like going to the movies or a food treat. It needs to be something that can’t be repossessed. Together they need to negotiate a fair repayment plan with you and decide what will happen if the other sibling or adult defaults on the repayments, ensuring the debt is fully repaid.
Bankruptcy is not an easy fix
When you’re young it can seem like going bankrupt is an easy fix, especially when you hear someone else did it and no longer owes anything to anyone. This just isn’t true.
Bankruptcy is a difficult option for resolving debt, it has long-term implications for your ability to get on with life and in New Zealand, there is a lot of stigma with bankruptcy. We all make mistakes, there are other debt solutions and in most cases, it is better if you don’t go bankrupt.
For the kids: Lend them a small amount of money, with a tough repayment plan. Then give them the option of not repaying it and going bankrupt or negotiating a new repayment plan that they can work with. Explain that if they go bankrupt, all their pocket money, birthday money and maybe a toy or item of clothing they love, will be controlled by you. Also, they won’t be allowed to borrow from you or anyone else again for a few months because you’ll tell those lenders that the child is bankrupt.
Debt is not a dirty word
It’s time for New Zealanders to start talking openly about debt. For too long a culture of not talking about money matters, and when we do we focus on savings with children – not teaching them about debt. Parents, guardians and whānau can change this by talking more openly with their children at a level that is appropriate for their age. We can change the money conversation, to give our young people control of their money and prevent them from unwittingly finding themselves with problem debt.
For the kids: Share with your offspring the real kids’ clothing budget, and together work out the cost of essential items and let them decide how to spend any funds that are left over. There may not be any money after the essentials, and you’ll need to talk about the options to either avoid debt or how borrowing will impact on them.
Let’s create a new generation of people that are empowered to make informed debt decisions that give them control and a more stable financial future.