How to Help Grand kids Avoid Debt

The best gifts to leave heirs often are not wealth or things. Knowledge, values and good habits are more important. From my vantage point, the best thing an older person can do for a younger one today is to provide an education on debt and debt management.

Today’s youth do not learn about debt management in school. Too often, their parents either do not discuss the topic or themselves do not know good principles. Many adults have high debt levels, leverage their home equity, and pay higher interest rates than they should.

Too many youth are following this pattern. Surveys show that 73% of private college graduates have outstanding student loans, with an average debt of $19,400. Credit card companies market heavily to college students. (In my day, a college student or recent graduate applying for a credit card in his or her own name was laughed at.) Credit card balances of $3,000 or more are carried by about a quarter of college students.

Bankruptcies and lifelong financial struggles often begin with high debts early in adulthood. High debt levels keep people from saving for retirement, accumulating the down payment for a home and car, and qualifying for good interest rates and other credit terms. Employment prospects also can be affected.

Here are some important lessons you can impart to the youth in your life to enhance their financial well-being.

• Getting a loan or lease approved isn’t the same thing as being able to afford something. Finance companies don’t care if you have enough money to save for retirement or the down payment on a home. Their goal is to make loans or leases that will be profitable. Even if you aren’t likely to be able to make all the payments, they will make the deal if the monthly payments are high enough. Something is affordable only if it does not interfere with meeting long-term savings and accumulation goals.

• Small expenses can be the most costly. The Starbucks near my home often is filled with high school and college students streaming in and out for their $5 drinks. They don’t realize that one such drink a day costs $35 per week and $1,820 per year. That is before considering the income that could have been earned by investing the money. Such concrete examples are better absorbed than abstract discussions of savings principles. You don’t want the kids to be misers or avoid doing things with friends that cost money. But you do want to teach about trade offs and the true cost of such small expenses.

• Set a debt-free age goal. Many families cannot afford college expenses, so student debt is necessary to receiving an education. But the student should set a goal of paying down those loans promptly and not take on significant other debts until that debt is paid. Encourage them to defer additional obligations, such as a lease for a nice new car. The reason for this goal is that a mortgage on that first home will be easier to get and will be for a higher amount if there aren’t other debts. Most college graduates should set a goal of being debt free by age 30 or so.

• Most people don’t start off adulthood with a lot of things. Too many youngsters think that soon after entering the job market they will be able to duplicate their parents’ standard of living. They don’t realize that it took their parents decades to earn enough to acquire their home, its contents, and their cars. Many parents today do not explain that to their children. They also don’t explain that they might not really own their home or cars. Each might carry debt, or the cars might be leased.

• Credit cards are the greatest threat to wealth. The interest rates are sky high. Minimum payments are set so that the debt will take decades to pay, and that is assuming no new charges are made. The credit is easy to get, so it can balloon out of control easily. Most bankruptcies are due to credit card debt. Credit cards can be a convenient way to pay for things. But youth should either use a debit card or be disciplined enough to pay the credit card in full each month.

• Pay yourself first. Young people should be taught the general principles of a budget. They also need to know that the first expense paid should be money set aside for their future. Retirement is an abstract concept for a young person. But owning a home might not be. Encourage the youngster to start accumulating money for a down payment and after that to start a retirement fund.

As a grandparent or parent you should bear in mind that spending problems often are a sign of something else. A person might be a compulsive spender because of depression or other problems. Some people spend to impress friends or to raise their self-esteem. Be alert for such issues and consider suggesting a professional counselor if there is a real issue.

A grandparent can provide valuable education and guidance on debt management. The lessons do not have to be in the form of lectures. During conversations, short tips on debt can be given. Personal anecdotes or stories about other people often are a good way to give lessons.
A young person should learn that managing money is about choices. Every time money is spent, the person is making a decision not to make that money available for another expense or not to save it for a longer-term goal.