Many people believe that the way to make sure that people are wise with money is to teach them form a young age. Although there is now some financial education in school, it is not very much and so it still falls to parents to teach their children. However, it is important that parents know exactly what to teach their children so that they get the useful information that they need.
Debt is something that we hear a lot about and probably one of the most important things to teach children. No one wants their children to get into lots of debt and struggle to make repayments. However, there are circumstances where debt can be useful and this is why it is wise to teach them the difference between good and bad debt. Although there is not a complete agreement on the definition of good and bad debt, good debt tends to be that which is used to improve yourself and can be repaid and bad debt is when items are purchased that are not needed and the person struggles to make the repayments. As you can this is quite broad and it is worth looking at each in more detail.
Good debt usually refers to things such as student loans and mortgages. Both of these allow you to better yourself in life and improve your finances in the future. With a student loan you should be able to get a better paid job, which will more than offset the cost of the loan, which you may not have to pay off in full anyway. A mortgage will allow you to be able to own a property so you can live rent free. You will have to maintain the home and you will be unlikely to get back the money that you have invested in it but you will be able to pass that onto your children, if you have any or other family members or friends, when you no longer need it.
Bad debt tends to refer to borrowing for items that you do not need and do not really make a big difference. This might be things like jewellery, nights out, alcohol, the latest gadgets and anything which is not necessary. Also this borrowing would be difficult for you to manage, so perhaps you have not researched properly and did not realise how expensive it would be or not calculated whether you would be able to afford the repayments.
The difficulty is that not all debt fits neatly into one of these categories. So although it is really important to understand the difference and find some examples of debt that fits in each, it may not be this simple in practice. Imagine you have been offered a job, having been unemployed but have to drive there and have no car. You need a loan for the car, but the job is temporary so you have no idea how long it will last. Is it right to buy the car and take the loan and the job or better to turn down the work and avoid the loan? This is tricky, if there is another earner in the household then this may add security with regards to income and the loan may be more manageable, if there are other similar jobs available then it may be easy to pick up work should this job end but of course this may not be the case. It is worth explaining how each decision is difficult and will depend on the personal circumstances of that person. Something which may seem like a luxury to one person, say a holiday might mean a lot to another if they are visiting relatives or getting a break from stress which is damaging their health.
It is important for young children to realise that debt is something which needs thought but that deciding whether to borrow or not is a difficult decision in many cases. However, if they know the thought process they need to take, such as how necessary the purchase is, whether they can afford the repayment and things like that, they will have a great grounding for being able to think through their own borrowing dilemmas.