Explaining why wealth and debt are both seen and unseen by children

by | Allowance apps, Homeschooling Financial Education, Kids Going Cashless, Kids, Money and Responsibility

Explaining wealth and debt to kidsWhen it comes to wealth and debt, kids believe what they see. They believe physical possessions are a sure sign of wealth; more stuff means more money.

Wealth is an accumulation of valuable economic resources that can be measured in terms of either real goods or money value.

Kids see physical possessions as a measure of wealth. They don’t see the amount of debt that may be attached to those possessions. Understanding wealth and debt is an important part of financial education.

Debt is something one party owes another, typically money. Debt can be secured or unsecured, with a fixed end date or revolving. Companies and individuals often take on debt to make large purchases they could not afford without it. Consumers can borrow money through loans or lines of credit, including credit cards.

A neighborhood kid was playing at our house. We were in the kitchen making lemonade when I opened a kitchen drawer stuffed with tableware and other utensils. She looked at me and said, “Wow, you must be rich.”  Far from it, there was just too much stuff in my drawer.

Here are some ideas for talking about wealth and debt with your kids.

Wealth and debt–visible and invisible 

When kids see big houses, cars, boats, and other physical possessions they believe that family is wealthy. That may be true.

However, when it comes to understanding wealth, there are families without impressive physical possessions, yet may be very wealthy.

Kids don’t realize that wealth can also be invisible in the form of savings and investments.

These numbers are invisible to others so someone living in a small house or a tiny apartment could be very wealthy on paper. Changes in the economy continually change the value subject depending on what’s going on in the financial world. 

Debt may look like wealth

On the flip side, kids can’t see debt because debt is another number in an account. Because debt is invisible kids don’t realize that people borrow money to acquire many of their tangible possessions. People take out loans to buy big ticket items.

Borrowing money creates debt

We routinely borrow money to buy houses and cars because we don’t have enough money on hand to buy them outright. These long-term loans involve fixed rates and specific monthly payments. Often we refer to this as “good debt” because people need houses and other large essentials.

However, using a credit card is a different thing entirely.

A credit card is a sneaky loan

Borrowing money can be as simple as using a credit card and not paying the full balance when the bill is due. When you use your card there is a one-month grace period. The interest is only charged if you don’t make the full payment by the due date.

Many people think credit card companies are evil, but they in business to make money like any other business. But they only make money when someone doesn’t pay the full balance.

In other words you can borrow money at no interest for the first month. After that you could be paying more than 20% for that tube of toothpaste.

Credit card interest vs mortgage interest

Today’s credit card interest (24.37%) is more than triple the interest (7.54%) on a mortgage.

As of August 2023, the average credit card interest rate in America is 24.37% — the highest since LendingTree began tracking rates monthly in 2019.

On Tuesday, August 29, 2023, the current average interest rate for a 30-year fixed mortgage is 7.54%,

The average cardholder had $6,568 in credit card debt in Q2 2023, up from $5,963 in Q2 2022.

Even kids charge interest

When reviewing our kids no-cash allowance account with them I saw that they were transferring money between their accounts. “Well, she wanted to borrow some money so we figured out how to do it by adding and subtracting in our accounts.”

When I asked about the interest being charged, she smiled, “I wasn’t going to just let her borrow the money for free.” My kids actually believed they had invented interest.

Watch on YouTube

Lynne Finch helps parents teach their kids about money from their first allowance to online banking. “It’s time to teach the kids how to manage money they can’t see or touch,” says the author of The No-Cash Allowance. Follow Lynne’s common sense approach for teaching children that money is a number with kids as young as pre-school and continuing through high school.

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