Debt Load Soaring Among Young Adults; Teach Teens to Avoid Debt
Current young adults, between the ages of 18 to 34 years old, have a real debt problem. According to a survey by NBC News, released in April 2018:
- 78% of young adults (age 18-34) have some form of debt.
- 25% are over $30,000 in debt.
- 11% are over $100,000 in debt.
- The majority of their debt is credit card debt, not student loans.
- 62% of young adults owe more in debt than they have in a personal savings account.
- 24% have no personal savings at all.
Due to their substantial debt, many young adults report delaying life steps. A third of young adults have delayed buying a home and/or saving for retirement, and approximately 15% have delayed marriage and/or having children.
If we want to raise the next generation to a responsible adulthood, then we must teach our teens more about money and debt. When teens are swiping their credit cards for a fun purchase, it almost feels like “free” money, so we must educate them that debt is not free at all. Here are tips for what parents should do:
Teach Basics of Interest, Credit and Debt
Teens must learn financial basics in order to make wise decisions with their money, and schools often do not teach these concepts. You should provide your teens with the following information:
- Definitions of Basic Financial Terms
- Interest, which is calculated as a percentage rate, is a fee for borrowing money.
- Credit is an agreement between a buyer and a seller in which the buyer receives the good or service in advance and makes payment later, often over time and usually with
- Debt is the amount of money owed to someone else.
- Explanation of Interest
- Interest flows in two directions – inward when you save, outward when you take a loan or run a balance on a credit card.
- Lenders are very willing to make credit cards available because they make money off interest and fees. Just because a bank offers you a certain amount of credit or loan amount, does not mean you can actually afford to pay that amount.
- Interest on credit cards is higher because it is an unsecured debt, while rates are lower on a house or car, because they are backed by collateral.
- Credit Scores
- Your credit score is calculated based on information in your credit Things that improve your credit score are paying off monthly balances on time and not holding too much debt.
- Lenders use your credit score to assess the credit risk you pose and determine the interest rate they will offer you if they agree to lend you A better credit score means a lower interest rate.
- Why Debt is Debilitating
- Explain that you actually pay far more for your desired item over the long haul by charging it instead of saving money for it in advance.
- The higher the interest rate, the more you’ll end up paying for your debt. Also, the longer it takes you to pay off and the higher your debt load, the more interest you’ll pay. In fact, some people pay more in interest than the price of the original item itself.
- All debt has risks. If your life takes a tumble because of a medical emergency, massive car repair or unemployment, even a reasonable debt load can become an unbearable burden. Everyone should have an “emergency fund” – a savings account that only gets touched when something unexpected happens.
- Monthly debt payments limit the amount of money you have to spend on other things, such as regular expenses, vacations, gifts, savings and retirement. The more debt you accumulate, the more your monthly payments will be.
- If you have high credit card debt, you can be rejected for other forms of loans, such as a mortgage.
- Too much debt limits your ability to make changes in your life. For example, you may feel trapped in a dead end job simply because you need its income.
Teach Teens to Budget
Learning how to budget is a crucial life skill for teens to develop before leaving their childhood home. You should sit down with your teen to explain the basic idea behind budgeting. They need to learn the process of figuring out how much income they will receive, what their ongoing expenses are, and how to save the remaining amount. It is very helpful if you’re willing to show your teen the family budget so that they can see how much things cost and how you manage it. An adolescent has no understanding of how much it costs to pay for rent, car insurance, food, and other critical needs. By explaining the expenses of your household, you are providing the teen a real world understanding. You can also have your teen help when it is time to pay the monthly bills.
Once they understand the concept, let them practice in real life. Give them control of the money that is used for their expenses. Determine which expenses will be your teen’s responsibility (e.g. school lunch, their monthly entertainment, their clothing budget, athletic fees, and/or their subscriptions to clubs or magazines) and then pay your teen an appropriate amount to cover these expenses every one or two weeks. Help your teen set up a budget but then leave them to figure out how to manage their money. Do not bail them out when they overspend on the “cool” jacket and don’t have enough money left to go to the movies with their friends – that’s the life lesson!
Let Teens Make Money Mistakes Now
Adolescence is the perfect time for your teen to make small mistakes with money. Yes, it will be frustrating if they blow the money meant for their entire school wardrobe to purchase one pair of cool jeans. BUT, better for them to make and learn from the mistake now when they still have parental support to ensure a roof over their head and food to eat. If they don’t learn these important life lessons now, then when they’re out on their own, they could make huge mistakes that could lead them to bankruptcy or other life altering affects.
Help Teens Set Money Goals
A money goal is a wonderful motivator for a teen to save for a desired item or to create a savings for the future. When we look forward to getting something we want, make a plan to get it and then work toward obtaining that goal, we learn important personal values like patience, perseverance, a strong work ethic and decisiveness. This process teaches teens an alternative to charging “wants” on credit cards and dealing with debt.
Be a Good Role Model
Experts note that all children learn the most from watching their parents. Even teens are copiers. They observe and imitate behavior — the good, the bad and the ugly. Children even take on the beliefs and attitudes of their parents – although teens often reject parental values for a short amount of time while trying to establish their independence, they typically return to their parent’s values as a young adult. So, it is vital that you demonstrate good behavior and traits that you want to see in your teenager.
Take stock of your own spending habits, debt load, and attitudes about money. Are you stressed out when paying bills? When you are in a store, do you announce, “I need this!” when looking at an item that clearly is a ‘want’? Do you frequently give in to impulse purchases? Do you argue with your spouse over money? Have bill collectors called you at home?
You want to show your teens that you are responsible with your money, and talking through your spending decisions is a great way to explain your values. Explain the difference between a want and a need, the benefits of thriftiness, and how you budget. If you, as a parent, see something that you would like but know you don’t have the money for, talk to your teen about how you are going to make a plan for saving the money to purchase the item. To fight impulse buys, consider establishing a “waiting period” for yourself on purchases – giving yourself one day to think about a purchase before making it – and discussing this process with your teen.
Launching Teens into Adulthood
As your teen leaves the nest, there is more information you should provide.
Credit cards. When your teen heads to college or reaches their 18th birthday, they will be flooded with offers for credit cards from department stores, oil companies and even banks. Many of these companies aggressively market their services with offers for free stuff in exchange for opening a credit card. It is critical that you have informed your teen about the financial basics, credit, debt, and how to budget. Unless they are taught otherwise, many teens are under the false impression that credit cards help them afford to buy more stuff!
Student loans. College has never been more expensive, and most families simply cannot afford it without borrowing money. You should discuss student loans with your teen before they head to college. Students need to understand how the different types of education loans vary in terms of interest and repayment periods, and how they all will require repayment over many years. If you’re trying to determine how much debt is a good idea for student loans, experts note that as long as the total debt at graduation is less than the annual starting salary of your child’s career choice, your child should be able to pay back his/her student loans in 10 years or less.