Prepare Kids for the Real World By Getting Them Into Debt

A lot of parents teach children that they should live within their means and only buy what they can afford. Some parenting experts, however, argue that this type of financial philosophy is ill-suited for today’s world. Instead, parents should be teaching their children how to take on and manage debt.

The New York Times’ Ron Lieber cites parenting expert Amy McCready, whose children pay her interest on major purchases:

Her boys have paid a 10 percent annual rate on loans for an iPhone and an electric guitar. That amount is small enough to be reasonable but big enough to feel a bit uncomfortable. She also recommends a written repayment plan and only one outstanding loan at a time per child.

McCready also encourages families with siblings to let their kids to loan money to — and collect interest from — each other. She believes it’s important to teach children about debt:

“A lot of people subscribe to the idea of not having any debt ever, and I understand it. I just don’t think it’s terribly realistic for a child who is going to have a school loan, a car loan and a house loan.”

I get this philosophy. I’ve written before about how we should accept debt management as a natural part of adulthood; there are plenty of reasons, from student loans to mortgages to dressing for the job you want, to borrow money on behalf of your future self. Why not teach kids that debt isn’t always a bad thing, and that there are ways to use debt to grow their total wealth? Maybe the McCready boy with the electric guitar is going to earn a few extra bucks teaching lessons or playing in a band. Maybe the one with the iPhone will become a Vine star.

Of course, I’m well aware that this type of financial plan requires parents to have enough disposable income to A) buy their children an iPhone and B) give their children an allowance that enables them to pay off that iPhone, with 10 percent interest, in a reasonable amount of time. McCready suggests first indebting your children at age 11, at which point they probably aren’t going to have many opportunities to earn extra cash. So you’ll loan your kids money, and then give your kids money to pay back the money you loaned them.

And if you’re one of those parents who teaches the gospel of “Don’t Buy Stuff You Can’t Afford,” well, you’ve got a high chance of your kid going to college, learning that credit cards exist, and attending every concert in Boulder, Colorado. Kids hear the dissonance between “don’t buy stuff you can’t afford” and “take out these student loans;” between the clunker car they have to buy with summer job cash and the car loan their parents negotiated. If you don’t teach your kids that credit is a tool, they’re going to make their own assumptions, and it’ll probably cost them.

But I did inwardly cringe at the idea of parents extracting 10 percent interest from their children and encouraging their siblings to earn interest from each other. That doesn’t seem like a family I’d want to live in, with everyone keeping notes on the other family members and passing around quarters and dimes.

(Also, while I’m on the subject: Lieber cites one child who charges 25 percent interest per day. If a kid can’t afford a dollar today, how is that kid going to afford a dollar and a quarter tomorrow? Ask the parents for another loan? Wait for allowance day, give all the allowance money to the lender, and then have to borrow money the day after? That’s one way to teach kids a lesson about debt, for sure.)

What do you think? Should we indebt our own children? Should we teach preteens that debt is a great way to get a new iPhone? Is there a better way to teach kids about the benefits of credit?

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