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Three Things You Should Teach Your Teen About Debt

November is Financial Literacy Month (FLM) in Canada. Not only is this a time for Canadians to focus on improving their own financial knowledge, it’s also a good time to teach children basic financial concepts that they may not learn in school. This can include topics like creating a budget, the importance of saving and even the concept of debt.

It may seem funny to introduce the concept of debt to kids, but it’s important that children learn how debt works and the importance of making smart financial decisions when it comes to borrowing money. Teens, in particular, can benefit from learning more about this topic. Here are three things that you can teach your teen about smart borrowing and avoiding debt problems.

1.) How debt works

A basic understanding of the concept of borrowing and interest is a good place to start when teaching your teen about debt. Make sure they have a clear understanding of how debt works. It may be a good idea to provide some sort of tangible way to apply this knowledge. This can be in the form of using a debt calculator so your child can see how long various debts take to repay, as well as the amount of interest owed.

Another option is to provide your teen with their first credit card. As many financial experts suggest, a credit card is a great and practical way for you to provide your child with their first experience borrowing in a controlled way under your guidance. With that being said, you don’t want them to find out about debt the hard way; giving them a secured credit card, where they only have a certain spending limit, is probably a good idea.

2.) The risks associated with debt

Any understanding of debt is incomplete without an understanding of the inherent risks involved. Have an honest discussion with your child about the risks of borrowing, including the fact that it can become a habit, it can leave you with less money for other, necessary expenses, and it can damage your credit rating if you neglect to pay your bills.

Along with a discussion of the risks associated, it may also be wise to discuss with your teen the times when borrowing may not be a good idea. This includes borrowing to pay your bills, to cover expenses or when you are not able to afford your payments.

3.) Managing debt

Some debts, such as student loan debts or mortgage debts, can be seen as good debt, because they can increase your net worth or earning power. As it’s more than likely that your child will encounter some form of debt in his or her future, it’s also important to teach your child about managing debt effectively.

As part of this discussion, you may want to introduce your child to the various debt strategies that can make debt repayment quicker and more effective, such as the ‘debt snowball,’ where you would focus on paying down debts with the lowest balance first, or the ‘debt avalanche,’ in which you focus on paying down debts with the highest interest rate. You may also want to discuss other debt management options as well, such as debt consolidation loans.

Financial Literacy Month is the perfect opportunity help your teen gain valuable financial literacy skills.  How will you teach your teen about money and debt this November? Join the conversation and share your thoughts with BDO Orillia using the hashtags #BDODebtRelief and #FLM2016.

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