Welcome to this post, Being Wise About Debt: What Teenagers Need to Learn This Early!
When it comes to finances, teenagers need to start acting like adults sooner rather than later. The reason is simple: the decisions they make now will have a lasting impact on their financial future.
Too many teenagers assume that they don’t need to worry about money or credit until they’re older, but this couldn’t be further from the truth. The reality is that debt can sneak up on anyone, and it’s important to be aware of the dangers before it’s too late.
What’s more, this debt will follow them around for years, impacting their ability to buy a car or a house down the road. And that doesn’t even include the stress and conflicts debt can cause in personal relationships.
We’re not here to scare you. But we’ve been there before. We understand how easy it is to get caught up in the moment and make impulsive decisions. But we also know how important it is to be wise about money.
So, to help you out, we’ve put together a list of things every teenager needs to know about debt below.
1. All Debts Are Not Created Equal
It’s easy for teenagers to think all debts are the same. Their parents may have impressed on them the importance of paying their mortgage or car loan on time, but they may not have talked about, say, credit card debt or student loans in the same way.
The reality is that all debts are not created equal. Some, like mortgage debt or student loans, can help you in the long run. Others, like credit card debt, can be costly and cause years of financial hardship.
Generally speaking, “good debt” is debt that’s used to purchase something that will appreciate or help you earn more money in the future. “Bad debt,” on the other hand, is debt that’s used to purchase something that will depreciate or won’t help you earn more money down the road.
For example, you purchase a PlayStation 5 on credit. The cost of the PlayStation and the interest you’ll pay on your debt will likely be more than the $300 you would’ve spent if you paid cash. Unless you’re a pro gamer, you likely won’t make any money off of your purchase. Therefore, the PlayStation would be considered “bad debt.”
Student loans, on the other hand, can be considered good debt. Yes, you have to pay them back (with interest), but a college degree can help you earn a higher salary, which means you’re more likely to be able to pay off your loans quickly.
Learning to differentiate between good and bad debt helps you spot financial traps and make smarter decisions with your money early on—decisions that will benefit you in the long run.
2. Credit Cards Are Not Free Money
For many teenagers who borrow their parents’ credit cards, the cash they spend often feels more like arcade tokens or play money than actual currency.
This is a dangerous mindset to have. Credit cards are not free money, and the sooner you realize this, the better off you’ll be.
Every time you use your credit card, you’re borrowing money from the bank that issued the card. And if you don’t pay your balance in full each month, you’ll be charged interest on the outstanding balance.
What’s more, if you only make minimum payments—as many first-time credit card users do—you’ll end up paying far more than you ever borrowed, thanks to compounding interest.
Let’s say you have a $1,000 balance on your credit card with an 18% annual interest rate and you only make minimum payments of 3% of your balance each month. If you keep this up, it will take you nearly 33 years to pay off your debt, and you’ll end up paying more than $2,700 in interest—definitely a raw deal.
Understanding the real-life stakes associated with credit card use is critical for teenagers. It’s easy to get in over your head with credit cards if you’re not careful, and the consequences can be costly.
3. Debt Snowballs…Fast
The wide range of credit card offers available to consumers can be dizzying, especially for teenagers who are new to the world of credit.
It’s important to understand that different types of debt have different terms and conditions. And while some types of debt may offer 0% interest rates or other promotional deals, the fine print often contains catches that can end up costing you in the long run.
For example, you may be offered a 0% interest rate on balance transfers for the first 12 months after opening a new credit card account. But after that introductory period expires, the interest rate on your outstanding balance will jump to 18% or more—and any unpaid balances will start accruing interest at that higher rate.
What’s more, if you’re late on a payment or go over your credit limit, you may be charged expensive fees that can further add to your burden.
Understanding just how quickly debt can snowball and affect other areas of your life is crucial for teenagers. It’s easy to get in over your head with debt, but it’s much harder to get out.
4. The Importance of a Future-Oriented Mindset
One of the most important things that teens can learn is how to think beyond just the present. This means understanding that the choices they make today can have a major impact on their tomorrow.
It’s a simple concept, but it can make a big difference in a teen’s life. For example, let’s say a teen is considering taking out a loan to buy a car. If they only think about the short-term ramifications of this decision, they might not realize how much debt they could be putting themselves in. However, if they take the time to think about the long-term impact of this choice, they might decide it’s not worth it.
The three previous items we discussed will all help in developing a future-oriented mindset. Understanding how quickly debt can snowball, for instance, makes it less likely for you to rack up a large amount of debt in the first place. And recognizing the true cost of credit card use can help you avoid using them unnecessarily.
Thinking about the future doesn’t just mean being mindful of your financial choices, though. It also means setting goals and planning for your future self. That way, you can use debt as a tool to help you achieve your long-term goals, rather than letting it control your life.
5. Debt Can Affect Personal Relationships
Delaying a loan payment or racking up credit card debt may not seem like a big deal when you’re young and carefree but, as you get older, you’ll quickly realize that debt can have a major impact on your personal relationships.
It may feel like your debt is separate from your personal life, but the truth is that it can have a major impact on the people close to you. For example, if you’re constantly worrying about money or fighting with your partner about financial issues, your relationship will likely suffer.
What’s more, if you’re struggling to make ends meet, your loved ones may be forced to help you out financially. This can cause tension and resentment, especially if they’re not in a position to help.
It’s easy to find yourself in these situations if you don’t recognize how large a role debt can play in personal relationships. Don’t put your friends and family in a position where they have to choose between helping you and taking care of themselves. Be mindful of your debt and work on getting it under control before it starts having a negative impact on your relationships.
6. Prioritize Your Debts
Remember debts you had at school? You may have borrowed a dollar or two from a friend, or maybe you owed your parents some money for lunch money. However large those amounts might have felt for you then, you could always count on the next day’s allowance to cover them.
The debts you’ll face as an adult are a different story. Most adults have at least some form of debt, whether it’s a mortgage, student loans, credit card debt, or something else. And unlike the debt you had in school, these debts will have to compete with other important bills for your limited income.
Knowing how to prioritize your debts early on is crucial for staying on top of your finances as an adult. This involves two key things: knowing when to tighten your belt and knowing which debts to pay first.
It’s easy to prioritize debt when you only have one or two payments to make each month. But with several debts in play, you must know when to make cuts in other areas of your budget to stay on track.
Similarly, you must also know which debts should take priority. In general, it’s best to focus on paying off high-interest debt first, such as credit card debt. That way, you can save money on interest and put more towards the principal balance.
7. An Emergency Fund is a Lifesaver
It’s tempting to think of debt as something that just happens, instead of something you have control over. But the fact is, you can protect yourself from many common financial emergencies simply by having an emergency fund.
An emergency fund is exactly what it sounds like: a stash of cash set aside for unexpected expenses. This could be anything from a job loss to a major car repair. Having an emergency fund gives you the peace of mind that comes with knowing you have a cushion to fall back on if something goes wrong.
We recommend an emergency fund that covers up to six months of your normal living expenses. That way, you’ll have ample time to find a new job or make other financial adjustments if you lose your income.
Debts made under duress are often the most difficult to repay. For instance, if your car breaks down, impacting your ability to get to work, you may be forced to take out a high-interest loan to cover the repairs. A robust emergency fund can help you skip the loan and cover the repairs with cash. This not only saves you money in interest, but it also gives you the peace of mind that comes with knowing you’re prepared for whatever life throws your way.
8. You’re Not Alone
The average American household has an average debt of $145,000. Despite this, debt is still seen as taboo, and many people are embarrassed to talk about it.
This shame can make it difficult to reach out for help when you’re struggling to make ends meet. But the fact is, you’re not alone. Millions of Americans are dealing with debt, and there are resources available to help you get back on track.
If you’re struggling to make payments, reach out to your creditors and explain your situation. Many companies are willing to work with you to create a payment plan that fits your budget.
Many non-profit organizations offer free or low-cost debt counseling. These organizations can help you develop a budget, negotiate with creditors, and make a plan to get out of debt.
If you find yourself in a financial hole due to debts, taking on it alone is never the solution. It’s hard to see the forest from the trees when you’re in the middle of it, making it even more difficult to make smart decisions about your money—that’s in addition to all the stress you’re under. Being proactive and reaching out for help is always the best strategy.
Teens today are constantly inundated with messages about the importance of going to college, getting good grades, and securing a high-paying job. And while there’s nothing wrong with any of these things, they can often lead to one thing: debt. Learning about debt early on is crucial for staying on top of your finances as an adult and living a financially free life. Use the tips above as a starting point, and be sure to talk to your parents or a financial advisor if you have any questions.
