We want our children to be independent, responsible, and disciplined when it comes to handling their finances. Learning about loans and credits is one of the most important lessons that they should understand to prepare them for adulthood.
Having enough financial knowledge can help them avoid common and simple mistakes that can impact their finances and credit history. They should also understand that small mistakes can have lasting consequences.
It is also easier if we teach them about good credit behaviors at a young age than unlearning bad credit habits they acquired over time. Hence, teach your children about credits to ensure their financial knowledge and prepare them for handling their finances when they are adults.
Explaining Loans
Your children should understand what loans are. Telling them the literal meaning can be vague and confusing for them.
Start by teaching the primary concept of borrowing. Loans are mostly borrowed money that you'll have to pay back on time.
If your kids borrowed something, like a toy from a friend, always instill to them that they should return it in good condition. Just like in loans, it is essential to return the money borrowed.
Providing allowance is an excellent way to get them into the practice of saving their money. Give an average allowance that is enough to buy things that they want, but not everything they desire.
Once they have substantial savings, borrow the money they saved. The amount you borrow should be comparable to what your child saved. If your child has saved $30, ask to borrow $25.
Keep the money for a week, then pay it back with an extra 10%. Tell your children that the extra money is what it cost for you to borrow their savings. They will be able to understand the concept of loan this way.
You can also use apps that serve as a family bank like FamZoo. You're the one lending them money and setting interest rates and terms that your children can see and make repayments. Apps like this can make the experience real.
Once they are a teenager, you can teach them different types of loan. Explain the differences between a personal loan, payday loan, business loan, and student loan.
You can make a table that specifies the differences and similarities of these loans to help teenagers grasp the idea.
You can also print sample forms of what they will fill up when applying for a loan, or let them see how you apply for a loan online. This will help them understand the process more.
Teaching about mortgage
As parents, we want our children to be homeowners someday. A part of that goal is teaching them about mortgages.
Teaching about mortgages also allows them to value money and the importance of having a place to live.
You can start teaching them about remortgage when they request for their own spaces or bedrooms inside the house. Instead of giving up one room for them right away, let them earn the space by allowing them to clean it on their own.
You can also let them allocate a small amount they should give to you for the room. This method best explains how a mortgage works. You should teach these life lessons before they leave the comfort of your home.
Most parents tend to give mortgage deposits to children for free for them to have their own spaces. Children end up foreclosing the house.
Avoid this mistake by guiding them through the process instead. It is important to instill that there is an equivalent value in owning a house.
Inform them what interest is
Interest can be a vague concept to explain to children. But, there are plenty of exercises you can do to explain this idea clearly.
You can tell your kids to save money and give them a predetermined percentage for every money they save. For example, you'll give them an additional $1 per week for every $10 they keep.
The more money they save, the more interest they earn. At the end of the month, allow your children to calculate the savings and the interest they made.
Once they fully understand the concept of interest, you can let them open their bank account for their savings and continue earning interests.
Explain how repayments work
In addition to teaching your children interests and how they work, you should also teach children how to make repayments and ensure that they don't fall behind.
You can practice making repayments when there is something your child wants but doesn't have enough savings.
Offer to give a loan, but make sure to explain the terms for the loan. Include interest and the payment plan.
You can use a calendar or a chart to track your child's progress. You can also add sanctions for every missed repayment.
Once they understand the concept, you can request for collateral that you can take if they won't be able to pay the loan off. This way, you can instill discipline and the value of making sure they are paying their debts.
Takeaway
As parents, we want to ensure that our children can achieve financial freedom. As long as you think they are old enough to comprehend, you should teach them how loans and credits work, so they are not overwhelmed when they reach adulthood.
Author's Bio
Tiffany Wagner has more than 30 years of experience working as a mortgage broker who helped her clients find the right loan for their personal and business strategies. In her free time, she loves to do aerobics and yoga.
