by Dave Ramsey
“I’ll always have a car payment.”
“Of course you need a mortgage to buy a house.”
“Student loans are ‘good’ debt.”
I guarantee your child will hear these common lies all the time, and they’ll probably start hearing them sooner than you think. Your kids are growing up in the most indebted generation in history. The average college graduate leaves school with $35,000 in total debt—and that’s before he ever gets a job!1 The great news for you is that you can prepare your child to avoid this financial mess. We’ve said it before: Winning with money is only 20 percent head knowledge; it’s 80 percent behavior. If you still have kids living at home, then you are in the perfect position to teach them the behaviors that will keep them out of debt and set them up to win for life.
The Biggest Debt Myths
DAVE: Normal in America is broke. So if you do normal behaviors, you will be broke, and if your kids are financially normal, they will be broke. In my book The Total Money Makeover, we cover a myriad of myths that normal people believe about debt. The financial industry has so successfully normalized debt through their marketing that most people don’t believe debt-free living is possible.
But this book isn’t for normal people. It’s for people who have figured out that normal isn’t good enough. This book is for weird people—people who are willing to act differently in order to become wealthy. And wealth is so unusual and abnormal that we must say it is weird. So if your goal is to take mediocrity to the grave and raise children who perpetuate your stupidity, then this book isn’t for you.
When you realize that normal isn’t working, you begin to examine the mythology believed and spread by normal people. Normal people say things such as: “You will never live the good life if you don’t finance that thing you want but can’t afford.” Normal people also say, “You must build your credit.” “You will always have a car payment.” “You can’t be a student without a student loan.” And, of course, “You will always have a mortgage.” This is the lingo, the language of normal people—people who live paycheck to paycheck and stress to stress, and who struggle all through life. Not me. As for me and my house, we have declared war on normal. We want total money weirdness!
Look Better Than You Are
RACHEL: When I was in high school, I had a friend who drove a brand-new car, always had a new designer bag, and kept up with the latest fashion trends. When a group of us planned to go to a concert, though, she told us that she couldn’t go because she couldn’t afford it. I was shocked. I went home and told my parents how confused I was. Everything about her screamed wealth and success, but she couldn’t afford a $150 concert ticket? I didn’t get it.
Mom said, “Rachel, just because someone looks like they have a lot of stuff doesn’t mean they actually own it. This may or may not be your friend’s situation, but remember, debt makes people look a lot better off than they really are.” That was such a powerful lesson for me, because in our household, debt was never an option. Even though I knew about debt, it didn’t click until that moment that debt basically enables people to live a lie. They can look like someone they aren’t. Debt allows you to put on a persona that everything is perfect, even though you may be broke, hurting, and miserable on the inside.
DAVE: Texans have a phrase for this: “Big hat, no cattle.” This means you are trying to look like something you aren’t, and this façade will keep you in the poorhouse. In the story above, Sharon used the opportunity as a teachable moment. She addressed the problem of debt and drove the point home for Rachel.
Slave to the Lender
I discovered this idea of debt-free living through the lens of my faith. When we hit bottom, I began studying the Bible and found that it had pretty clear principles for handling money. The easiest, yet hardest, principle I found was debt is never a good thing. The Bible never calls debt a sin, and it is not a salvation issue. But nowhere in Scripture is debt mentioned in a positive light. Instead, it says, “The rich rule over the poor, and the borrower is slave to the lender” (Proverbs 22:7 NIV). Slave is a powerful word. A slave can’t go where he wants to go or do what he wants to do because he has a master calling the shots. Why do you think they call it MasterCard? The Bible says over and over that if you purposely put yourself in debt, you are a fool, you are a slave, and debt is a curse. There is not a single verse in the Bible that says something good about debt. So I have concluded that biblically speaking, debt is stupid.
If you are not a person of faith, then biblical truth may not matter to you, and that is your choice. But for me, as an evangelical Christian, I believe the Bible is God’s Word and the Truth when nothing else is. From that perspective, once I learned that debt isn’t biblical, it made not borrowing money an easy decision—it was an act of faith. It was also an easy decision because, having just been bankrupted, no one was lining up to loan me money, nor was I excited about getting back into the mess I had just gotten out of. At the same time, not borrowing money was the hardest decision I have made, because the financial community thinks I am nuts and sets out every day to tell me how primitive, unsophisticated, and backward I am for no longer believing the mythology that has guaranteed their financial mediocrity.
Preventative Medicine
RACHEL: As we walk through some of the big misconceptions about debt, I want to remind you of something. I said earlier that I like to view my dad as the emergency surgeon, but I’m the preventative medicine. That’s exactly what we’re doing here: preventative medicine. So far in this book, we’ve worked to lay the groundwork for your child to win with money. If she does what we teach, she will win. It’s a proven system that we’ve seen work more than a million times. But we can’t just stop at what she should do; we also need to focus on what she should avoid. And the number one thing to avoid is debt. That includes credit cards, car loans, and yes, even student loans. If your child can stay away from debt for life, she can completely avoid most of the financial nightmares that this generation is facing, and she will never experience the stress of owing anything to anyone. That’s what preventative medicine is all about.
THE BIG LIE: YOU NEED TO BUILD YOUR CREDIT SCORE
DAVE: I get so frustrated with parents who teach their children that the credit score, or FICO, is their provider. Well-intentioned parents spend an amazing amount of time indoctrinating their kids with the lies of the system, the greatest of which is that you must “build your credit.” The lie of normal says you must borrow money to build your credit so you can borrow money to build your credit so that you can borrow money. I wonder if that dog will ever catch his tail? My FICO score is zero, undeterminable. So how do I survive? I pay for things or I don’t buy them. Weird, isn’t it? Teach your children to be countercultural in a culture that has lost its mind.
Check our website or FICO’s website. The algorithm that is used to produce your FICO score contains just a few mathematical items: 35 percent is based on your debt payment history, 30 percent on your debt levels, 15 percent on length of debt, 10 percent on new debt, and 10 percent on type of debt. Show this to your young teenager. Point out that 100 percent of your FICO score is based on debt, not on wealth. Zero percent is based on cash position or savings. Zero percent is based on income. Zero percent is based on net worth. Zero percent is based on investments or retirement savings. Zero percent is based on paying your utilities on time, buying food for your family, or living on a budget. Zero percent is based on financial discipline represented by saving up and paying cash for a car, college, a wedding, or even a house. One hundred percent of your FICO score is based on how often you say, “I love debt”—on how often you play kissy-face with a bank. A high FICO score does not say you are winning with money; it says you are successful at borrowing money. Normal people worship the great FICO; wealthy people don’t. Teach this so loudly, clearly, and often to your children that when someone tries to convince them that they need to build their credit or credit score, they will look at that person with pity and relish th
eir own weirdness.
Have “The Talk” with Your Kids
RACHEL: One day back in my freshman economics class, the professor started going on and on about how important the credit score is. He told us that we couldn’t buy a house or drive a nice car without a credit score. He said we had to protect that score at all costs. Then he leaned in and told a roomful of eighteen-year-olds that we all needed to go out, get a credit card, and begin using it immediately so we could start building our credit.
This may surprise you, but my parents and I never talked much about the credit score when I was growing up. We focused on things like work, saving up to buy things, paying cash, and why debt in general is such a nightmare. So when I got this advice from my college professor, I was confused. I went back to the dorm and researched it online, then I called Dad to ask him about it. He explained it to me, and in about five minutes he showed me how stupid that little number is and how it really has nothing to do with being successful or building wealth. When your kids get to college, they’re going to get money advice from other people—even their professors. It may be good or bad advice, but either way, it’s coming. Go ahead and prepare your kids by arming them with knowledge like my dad shared with me.
CREDIT CARDS
The credit card is one of the best ways to guarantee your child will live in bondage to debt his entire life. With every swipe, the banks will steal more and more of his future. The problem is, our culture has made credit cards the norm. People really believe you must have a credit card and that you just can’t live life without one. And the debt that people walk into in the name of airline miles, cash back, and other perks blows my mind. So if I go $10,000 into debt with this credit card, I’ll earn enough miles to buy a $500 airplane ticket? Uh . . . am I missing something?
The Credit Card IS an Emergency
DAVE: Think about it: When is the dumbest time to go into debt? When you are broke. When you are in financial trouble and have no money, that’s the worst possible time to borrow money, especially on a credit card with a high interest rate. It is ridiculous. Yet I have done it and you may have too. Why? Because no one ever trained us—like you are now training your children—to have a plan, to save, and to have actual money in an emergency fund. By now, your children should be seeing the fruit of the earlier chapters as it plays out in practical results, like not needing a credit card for emergencies.
“But I Pay Mine Off Every Month”
RACHEL: One of the biggest problems I have with credit cards is the “I pay it off every month” mentality. I get that this is true for a lot of people (not for everyone who claims it), but even so, this is a terrible way to go through life. Using a credit card for daily expenses in the name of “convenience” is another way of saying, “I don’t want to do a budget.” I have never met someone who uses a credit card for everyday purchases and does a zero-based budget at the beginning of every month. Instead, the people who charge everything just pay the bill at the end of the month or, even worse, sometimes the following month. When you do this, you are throwing your income behind you, paying off things you have already used or done. That’s like driving a car by looking only in the rearview mirror. You can only see where you’ve been; you have no idea where you’re going or what it’s going to take to get there.
After one of our live seminar events, I talked with a guy who had recently cut up his credit cards. He said, “Rachel, I used my Discover card for everything. If I bought it, I put it on the Discover because I wanted the cash-back bonus. But I had no idea what I was spending! On payday, I’d just send Discover most of my paycheck to cover the past two weeks of spending. Even though I was at least breaking even every month, I wasn’t going anywhere. I didn’t have any kind of financial future because I was too busy sending all my money into the past.”
If you teach your kids how and why to budget, and if you teach them to avoid debt like the plague, they’ll never see the need for a credit card. They won’t need the “convenience,” because they’ll have an actual plan for their money. You want convenience? Teach your kids how to budget. If you want them in an endless cycle of debt their whole lives, go ahead and give them a credit card. It’s pretty much that simple.
Cash Hurts
DAVE: When your kids enter their teen years, they will be bombarded by credit card offers. By the time they are seniors in high school, they will be getting dozens of offers to sign up for credit cards. So when your child is in his early teens, lay a card on the table with fifty ten-dollar bills ($500) next to it. Ask your child which one feels like the most money and which one feels like real money. You want your teen to verbalize that cash has much more emotional weight than plastic. The danger of plastic not having the emotional weight of real money is that people spend more when using plastic than when using cash. Why? Because spending cash hurts. Handing a salesperson $1,000 in cash for a new sofa feels a lot different than flipping a piece of plastic up on the counter. Since personal finance is 80 percent behavior, train your child to feel money. They have to be emotionally impacted when making a purchase, or they will continually overspend.
Kids and Credit Cards
RACHEL: Love them or hate them, you at least have to recognize what an amazing job the credit card industry has done in marketing their products to us. They figured out that parents have just about all the cards they can fit in their wallets, so the banks had to change tactics. That’s when they started using something called “kiddie branding.” If you stop to think about it, it seems ridiculous that Visa would spend millions of dollars marketing its product to little kids. But have you seen the Game of Life recently? It has the Visa brand all over it. That fits in perfectly with their “Life takes Visa” marketing message, doesn’t it?
Monopoly has also gotten into that game and is offering a credit card version. When I was a little girl, I even saw a Barbie with a MasterCard attached to her tiny plastic hand—and a full-sized card for the child to play with. Why do the banks spend money putting their logo in front of an eight-year-old? Because ten years later, when that kid gets three credit card offers in the mail on the first day of college, she’ll already know which one she wants. She’ll subconsciously think, Barbie uses MasterCard, so I should too. You’ve got to teach your children to recognize these messages whenever you watch a show together or pick out a toy. Don’t let a credit card sneak past you! Be on guard with your kids.
Credit Cards Don’t Teach Responsibility
DAVE: Sometimes parents will actually tell me that they are getting their teen a credit card to teach them to be responsible. Are you kidding me? Credit cards don’t teach responsibility. They teach that you can buy something you can’t afford today, but hope to pay for tomorrow. When you teach a child to lean on a plastic crutch, you are teaching them that they don’t have to delay pleasure, or sacrifice, or save up and pay cash for things. You are teaching them that they don’t need to save for a rainy day, because the plastic umbrella is always there. You are teaching them really bad values that will lead them into debt, which may take them a decade to clean up.
Cards Go to College
RACHEL: One night back in college, a few friends and I took a study break and went to a local burrito restaurant for dinner. As we walked up to the place, we noticed a guy slightly older than us sitting at a table at the entrance. The table had tons of brochures scattered everywhere and a big banner overhead. He said, “Hey, girls, do you all want a free dinner tonight?” For a handful of broke college students, the answer was not difficult. As you can imagine, we enthusiastically said yes!
“Great!” he replied. “Just sign up for this credit card, and we’ll pay for your dinner.” I laughed it off, but one of my friends walked up and filled out the form right then and there. It took her all of about two minutes, and she was done.
After we got our food and sat down, I asked my friend why she did that. She said, “Oh, Rachel, it’s no big deal. When it comes in the mail, I’ll probably just cut it up. And if I end up keeping
it, I’ll use it just for emergencies.” That phrase sent off alarm bells in my head. My parents had always taught me that’s how so many people end up with a pile of credit card debt. They think they’ll just use credit cards for emergencies, but then life happens and they end up in debt, one little “emergency” at a time.
That’s exactly what happened to my friend. A month after getting that card in the mail, her laptop broke, so she ran out and charged a brand-new one on her “emergency” credit card. Soon after, a mutual friend got engaged, and she charged a bridesmaid dress too. The next month, she received a $1,100 credit card bill in the mail. She didn’t have the money to pay it, which created a lot of stress. She had no idea how to pay the bill, and she panicked just thinking about what would happen if her parents found out. Within a month, my friend went from carefree to full-blown panic mode because of that little piece of plastic. And it was all for a $7 burrito.
Too many college students see getting their own credit card as a rite of passage into adulthood. But getting a credit card doesn’t make your student an adult; it makes her a slave to debt and sets her on a potentially lifelong course of spending money she doesn’t have. When you train your child from a young age how to spot those marketing tactics, and if you teach her that the borrower truly is slave to the lender, you’ll empower her to walk right past the debt salesman at the college burrito restaurant.
Debit or Credit?
DAVE: The only plastic we use in the Ramsey house and the only plastic we taught our kids to use is the debit card. Since a debit card is attached to a checking account, your teen has to have money in the account, or they will trigger insufficient funds charges. Remember, Rachel knows this all too well. Take the time to teach your child that while the debit card looks like a credit card, it is a much more responsible way to make purchases, and it won’t get them into trouble unless they use it incorrectly.