This past year I graduated college debt free…which makes me an anomaly among my friends. Many of my friends owe more than $50,000 (my boyfriend has more than $150,000 in college debt!) and have no strategy for paying it back. Many of them know almost nothing about how to manage their finances and are unaware of how costly high interest rates are! I was lucky enough to have a father who drilled me on the importance of staying out of debt AND gave me the tools to do so.
6 lessons to stay out of debt
1) What is interest? Interest can be good (for savings) or bad (for loans/credit). Educating children about the effects of interest rates can help them avoid debt in the future. Taking out high interest rate loans to pay for college was one of the most common mistakes among my friends. Many were unaware how interest really worked and because of this didn’t look into other options when presented with high interest rate loans. An easy way to avoid this is by educating children on the subject. Use a loan calculator to explain how interest can work negatively. For example, if you took out a $20,000 loan with a 6.8% interest rate and had a 10 year plan paying the minimum monthly payment of $230.16 would result in paying an extra $7,619.31! Use a compound calculator to explain how interest can work positively. For example, $2,000 in savings left to grow for 10 years with a 5% interest rate would turn into $3,257.79. Making children aware of the consequences/benefits of interest will help them make responsible choices in the future.
2) Help them choose a credit card – My Dad set me up with a credit card in high school. While he paid the balance for me (it only had a $100 limit at the time!) he sat me down and he explained why he’d chosen the card over others. He explained the rewards program, the interest rate, and how this card could be linked to his account. Explaining why he chose the card made me aware of what to look for in a “good” credit card. I have yet to be fooled (yay!).
3) Explain how to use credit – When you get your first credit card it seems like it’s free money…until the bill comes! My dad taught me to think of credit as cash. If you don’t have the money in the bank you shouldn’t be charging it. He encouraged us to use credit frugally and pay pack the entire balance every month. I’ve been doing this ever since and I’ve never regretted it. Credit is a great way to earn rewards, discounts, and even cash back BUT kids need to be taught the importance of living within their means when using credit.
4) Teach them that college is an investment – I went to an in-state school because I wasn’t sure what I wanted to do. While I was figuring that out (still working on it) I didn’t want to rack up over $100,000 in debt by going to an expensive out of state school. College is a great experience and staying in-state isn’t for everyone BUT many people don’t think of college as investment. Going to a $40,000 a year school when your major’s average salary is $30,000 will result in a lot of long-term debt. For this reason, shopping around and applying for financial aid and scholarships is key. College IS an investment in your future but being left with hundreds of thousands in debt you’re struggling to pay back isn’t a great way to start adult life.
5) Explain your money choices – Do you have a credit card? Debt? Investments? Explain to your children your financial situation and the choices you’ve made that got you there. Whether you’re paying off debt or watching your savings grow children can learn from your mistakes and successes.
6) Educate them on investing – Every Sunday when I was younger I can remember my dad looking at the paper and checking his stocks. It was a fun game to us kids to watch them go up and down with him. It wasn’t until I was older that I realized these stocks meant money! My Dad always shared the stocks he had chosen and why all of his saving weren’t tied up in the stock market. He explained that there are high risk and low risk investments (Mint.org has a great risk/rewards chart!) and having a mixture of the two is a great way to stabilize your savings. I’ve now invested in stocks of my own and am comfortable with investing. Investing is an area that many people shy away from but investing doesn’t always have to be high risk and is a great way to increase your savings.
Let’s go back to the older days when kids had an allowance and learned to use it. Too many parents will buy their child whatever they want when the child wants it. Other than necessities (which differ with the economic situations of the household) there are things that children should be taught that they may have to buy for them selves i.e. a specific toy when it’s not their birthday or a holiday. Many of these item that the parents buy will be used once or twice and then ignored.
Children need to learn how to save their money for what they want. This which will make them think twice about the purchase, and by the time they have the money saved, they may not want to spend it anymore on that item at all. It will teach them decision making, financial responsibility and patience.
Dacia Daly says
That’s a great point Myke! I always had an allowance and I had to help around the house to receive it. It was only around $5 a week ($15 when I got older) but it taught me to save and manage my money at a young age. Learning to save is very important…and too many people learn this lesson much too late!
Myke touched on it–that “R” word: Responsibility. If someone borrows money, for whatever reason, it is morally that person’s responsibility to repay it. Too many people have the mentality that college students should somehow be exempt or granted special consideration. Just today in our local newspaper, there was an article on debt in general with the comment that college students in particular are “hard-hit,” as if it’s being done “to” them. Who is hitting them hard? The entities that rightfully expect to be repaid.
Dacia Daly says
I agree with your comment Diane. Students definitely need to be held responsible for their debt. Many of my friends told me I made a mistake by choosing an in-state school (I wasn’t thrilled myself) but financially it made the most sense. Now, they’re jealous that I have no loans! I’ve also seen many college students who are struggling much more than they would have had they been educated about interest rates, loans, and finance in general. Many of my friends are paying back their loans and do hold themselves responsible…they just wish they’d made better decisions. While dealing with the debt they created is their responsibility, I’m hoping these tips can help others avoid the same mistakes! Do you think educating college students about these subjects will make them more responsible?
I would hope so, Dacia. However, people are wired differently. It would also depend on whether their parents, other relatives, friends, etc., had influence one way or the other. Has someone always “bailed them out”? Or have they been guided to be responsible for their actions?
Your tips can help others IF they are open to what you have shared. Do you and BB receive much feedback from college-aged people about the various topics (not just college debt)? Notice I said “college-aged” rather than “college students.” My observation of the comments I do read is no; more come from older (and, hopefully, wiser) readers.