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As children become teenagers and begin growing both physically and mentally, parents begin to find their “little ones” get too big for more than just their clothes. A developing teen with tastes and preferences all their own is a teen who will inevitably want to make bigger, more expensive purchases.
Gone are the days of giving little Billy a $5 bill to spend on comics and candy. Teenaged William is interested in buying a car, and he’s looking to you for financial assistance.
But before you throw a chunk of change right in Billy/William’s lap, it’s important to use this opportunity as a teaching moment. Parents should feel encouraged to lend their kids money and be paid back as part of a financial exercise in credit, lending, and timely payments.
As a parent, you should ask yourself these five questions before lending your teen money for a big-ticket item:
Technically that’s not a question, but children do grow up fast. Try not to get too emotional… let’s move on to the next question.
While even necessary items can cost a pretty penny, it’s those luxury items teens should really learn to budget for. Responsible adults have to weigh all factors when making purchase decisions, often deciding not to buy a luxury item in favor of necessities.
If your teen needs an item to advance their education or career, it doesn’t necessarily make it a necessity — luxuries can exist within necessity. But purchases that directly link to income (i.e., car for transportation) or education (i.e., text books) are obligations that should warrant a loan. Just make sure your teen actually uses these items once they’ve been purchased!
It’s difficult to pay off a loan without an income stream. If your teen doesn’t have a part-time or side job, think about implementing an allowance-for-chores system. This will teach them the value of a dollar. If your teen does have a job, encourage them to start saving some money with each paycheck and begin budgeting for loan payments.
The point of the parent/child money-lending exercise is two-fold: it gives teens a taste of adulthood while introducing them to all the intricacies of money management. The exact process you set up for your teen is up to you. Will you set a payment due date? Will you add interest? It’s all up to you. Remember not to distort the reality of the process though, which can provide your teen a false sense of potential consequences.