How to teach your kids about: Debt
Imagine this scenario.
You go to a shop and see something you like. Let’s say it costs £1,000. Unfortunately you don’t have £1,000, i.e. you can’t afford it. Noticing your disappointment the salesperson comes up to you and says “I’m a nice person and I can see you really want this thing you can’t afford, how about I sell it to you for £1,500! Want to buy it?” Now this seems like a mad scenario. Why would anyone accept that offer?! Action 1 - Ask your kids if they would accept this deal (fingers crossed they say no!) The sad truth is that most people face this scenario all the time and lots of people do actually accept this offer. Crazy right! In this blog I go through why people end up accepting this deal and how you can help your kids grow up avoiding it. Better still, at the end I go through the two bonus benefits your kids will get from not accepting this deal which will make them financially better off. Why do people accept this bad deal? There are two reasons why people accept this deal:
First is that they get to have the thing they can’t afford NOW
Secondly the salesperson re-words the offer so people don’t realise how bad the offer is.
In this blog I’m going to focus on the second reason, i.e. the re-wording of the offer. I’ve written about how to help with the first reason, instant gratification, in another blog (link at the end of this blog). The re-wording of the offer If I wanted to sell you something, clearly I wouldn’t offer the deal as I have outlined above - no one would want to pay more for something they can’t afford. This is the reason companies change the wording so that people feel it is a good deal for them. The trick is that they spread the cost over time. So now instead of saying you have to pay £1,500 (large scary number), they say you can pay us £100 (small reasonable number) per month for 15 months. It’s the same bad deal! It’s just written differently and it fools most people. I know a lot of people who when asked how much something costs, will quote either the price displayed (i.e. £1,000) or the monthly cost (i.e. £100 per month). In most cases, they won’t even know that the actual cost is £1,500. If they did, I would hope they might think twice about buying it. If you can’t afford £1,000 then you definitely can’t afford something that is £1,500. Teaching our kids to avoid being tricked The salesperson knows the trick will work as they know so many people focus on the cost now and ignore the future.
Avoiding this trick requires a skill, or Superpower, which a lot of people struggle with. That Superpower is ‘Clairvoyance’, the ability to see into the future. To help our kids look into the future, we need to help them visualise the future. This is where the seeds and tree analogy I use in so many of my blogs comes in. If they see money like seeds, then they will know that money will grow over time if planted. If they plant their seeds, i.e. save or invest, then they will see their money grow. For this topic, they need to see that if they borrow money (i.e. pay for something over time), then they owe someone some seeds. The key is that the seeds they owe start to grow over time. So they don’t have to pay back just the seeds but instead they have to pay back whole trees. I call these trees ‘Red Trees’ (I also discuss Red Trees when teaching my kids about Credit Cards which is very similar to this topic - full blog here). They need to know that a Red Tree can grow very fast. Therefore rather than seeing the cost as the amount of seeds, they need to see the cost as the amount of Red Trees. They will quickly appreciate that trees are much bigger than seeds.
The sooner they learn that money is like seeds and understand that over time these seeds grow, the more likely they are to master the Superpower of Clairvoyance. Action 2 - Talk to your kids about money being like seeds. Let them know that if something has to be paid for in the future then it will grow like a Red Tree. The Real Financial Superheroes - The triple benefit of saving Above I talked about the Superpower of Clairvoyance. This superpower is part of becoming a Financial Superhero. To get a real sense of the benefits of being a Financial Superhero, let’s compare two people. Let’s call them (Jealous) Jo and (Sensible) Sam. Jo unfortunately falls for the salesperson’s bad deal. Sensible Sam is a Financial Superhero (like your kids will be in the future).
1. Firstly, Jo spends all the seeds he has received over time. Sam, from an early age saw money like seeds and began to plant some seeds (at least 10% of all the seeds she received) from an early age. These seeds grew and started to produce more seeds. Sam was already starting to build wealth faster than Jo.
2. Secondly, when they want to buy something, Sam has enough seeds to buy it now. Jo has to accept the bad deal. This means Jo is paying a lot more than Sam for the same thing. Not only has Sam benefited from the extra seeds earned from saving from a young age, Sam now doesn’t have to overpay, whereas Jo has to.
3. Additionally, in some scenarios Sam can afford to buy the thing she wants and, may be able to negotiate to reduce the price which further increases how much better off she is.
Hopefully your kids will grow up more like Sensible Sam than Jealous Jo. Action 3 - Help your kids start to save their money and explain how these savings can make them better off in the three ways set out above. Summary Those that fall for the bad deal will pay more for the things they want and therefore miss out on the opportunity to save in the future, i.e. the fools will get poorer. Those that don’t fall for the deal will actually pay less, i.e. the savers will get richer. Help your kids understand the potential deals they will be offered. Use the tree analogy so they become masters of the Superpower Clairvoyance. Reminder of the three actions:
Ask your kids if they would accept this deal.
Talk to your kids about money being like seeds. Let them know that if something has to be paid for in the future then it will grow like a tree.
Help your kids start to save their money and explain how these savings can make them better off in the three ways set out above.
To help your kids learn more financial superpowers, get your free ebook ‘How to train your kids to become Financial Superheroes’ here. What to read next? This blog will help you teach your kids about avoiding ‘instant gratification’ by saving money to spend later. Remember, a lot of people fall for the bad deal as they have to have what they want NOW! Thanks for reading!
Here is a list of other blogs in the 'How to teach your kids about:" series: