Author: Josh Swetnam

Teaching your kids about interest and borrowing

I remember when I was a lad, I caught on to certain subjects faster than others. More than anything, I put this down to the way my teachers chose to operate.

To me this made sense – because if all teachers are given the same curriculum, but their classes achieve different results, what other conclusion can be drawn?

When it comes to money, I was lucky to have scored some fantastic maths and commerce teachers over the years, so my knowledge flourished.

A few of my customers have mentioned to me over the years that they have had trouble getting their kids to understand the concepts of borrowing and interest. This is understandable, given kids have very little experience with money at all, let alone different methods of payment and credit.

After thinking back to my school days, I’ve come up with some of my best tips on easing these concepts into your child’s lexicon, to avoid frustration and ensure the knowledge sticks.

Start Early

When teaching young children, you need to work with the tools at hand. You can teach a child about borrowing by showing them how to borrow and return toys. Show them that by lending a toy to a friend, and having it returned, you establish credit with the friend. This may then enable them to borrow a toy from their friend in future. Keep it simple.

Tuck Shop Loans

As your child becomes familiar with the idea of exchanging money for goods and services (usually around primary school age), you should be able to introduce them to their first small loan. Ask them one morning if they would like to order their lunch from the canteen. When they say yes, establish the fact with them that you will give them the money for their lunch, but let them know that they will have to repay the money in the form of household chores or pocket money. This will allow them to understand loans in their simplest form.

Understanding Interest

It can be an uphill battle explaining interest to kids when they are on the pointy end of the stick. It works much better when they’re on the winning end. Encouraging your kids to open a high interest Savings Account, like The Greater’s Life Saver, is the perfect way to show how interest works. Explain to your kids that the way to think about it is as if they are loaning the bank some money, and so that the bank can hang onto it, they need to pay back a small amount of interest. Then just tell them to reverse the concept when it comes to borrowing money.

Calculating Repayments

Once your child is old enough, they will more than likely come to you for something substantial, such as a new electronic device, or maybe a new bike or sporting goods. This is your perfect opportunity to show them how a loan works. Tell them you will loan them the money, and sit down with them and work out a repayments plan and a set interest rate. Make it manageable, so their pocket money can cover the repayments, and use the online tools available to map out a repayments plan. The Greater has a repayments calculator that lets you punch in your own loan figure, interest rate and repayment period – check it out here.

By keeping it simple and showing your kids how interest and borrowing works, instead of just telling them, the knowledge is more likely to stick with them.

To find out more about our Life Saver Account – click here.

To use The Greater’s full suite of free financial calculators – click here.

And for more tips on providing your kids with the right financial education, check out our range of How-To guides here.

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