Wednesday, March 9, 2016

Formalize Your Loans To The Kids

Kid Loan Application

One of the worst financial signals you can send to your kids is to loan them money without insisting they pay it back.

Consider the precedent and expectation you’re setting there. Not good.

The solution?

Don’t make loans to your kids. That’s the simple answer according to some.

But maybe there’s a better answer: treat loans to your kids like real loans, not gifts.

Formally track repayment. Charge an interest rate. Falling behind on payments? Garnish your child’s wages — i.e., allowance, chore, or odd job payments.

Too much hassle? Use a spreadsheet or an app to simplify the process.

The bottom line: Kids need to understand how loans work in the real world. They need to have a visceral understanding of just how painful debt can be. If they do, they’ll be more careful with that first loan as a young adult, be it a student loan, a car loan, or carrying a credit card balance.

So, don’t make fake loans to your kids, or they’ll end up in real financial trouble later.

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