The Right Way to Let Your Kids Run a Tab

lending-money-to-familyNumerous times while on shopping trips my son has begged me for money to make up for the difference in what he has and the cost of the item that he wants.

At first I refused, he needed to learn how to wait and save up for what he wanted.

But then I began to think about all the lessons that I could teach by letting him borrow some money.

So I took the leap and started letting him start borrowing money from me.

The lessons I could teach him have been great.  He has learned time management, cash flow management and what it is like to owe someone money.

Yet this has only worked because I stuck to some guidelines and did not waiver on them.

Here is what I followed so that you can also help your child learn some great lessons from borrowing money.

Set a Loan Due Date

Do not make this an open ended tab.  This is a once in a while thing that you let them do.  There is a specific date that the money is due – no wiggle room!

Interest

Determine if there is going to be interest due on the loan.

I can see doing it either way depending on what you are trying to teach.  So far we have not charged interest, but we wanted to start with the other lessons that go along with debt such as learning how to earn the money to pay for it and cash management.  Now that those lessons have been learned, we will most likely add interest next time.

Penalties

Decide what the penalty is going to be if they do not pay on time.  For example, my son recently saved up for his own iTouch. He was only $30 short and had a coupon for $15 dollars off, so he asked if I would cover the $30 so that the coupon did not expire.  I said yes, but if he did not pay in time I got the iTouch until he paid back the money.

Put it in Writing

In order to ensure there is no confusion on what the agreement is you need to put it in writing.  It does not need to fancy or formal, but it does need to get written down.

We write ours out on a white board in my office.  We record the amount due, the date due and the penalty.  This is also where we track how much is still due.  Every time he would make a payment we would do the math on what was left and then record the new number!  (Math lesson and money management lesson all in one)!

Now these are the basics to making it work but there are a couple things I want you to keep in mind if you are considering doing this.

  • You must make sure that you make them stick to the rules.  You cannot waive the penalty, or waive the loan.  If you do not stick to what you agreed to then you eliminate all lessons that you were trying to teach and instead end up teaching some really bad lessons!
  • Don’t set them up to fail.  If there is no way they can make the money in the time frame you set then you are teaching the lesson the wrong way.  If failure is the lesson then make it be on something that was one hundred percent achievable and not on something they could never accomplish.
  • Do not do this exercise for kids with a job or out of high school.  This is really a way to help your younger kids learn about making money, saving money and debt.  If they are already out of your house then it becomes more of a hindrance on allowing them the drive to succeed.  It become enabling them to not manage money correctly.

Teaching your kids about loans early with you is a great way to help them learn the negatives and the positives.

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