When financial expert (and budding entrepreneur) Alison Griffiths was 14, she borrowed money from her dad to start her own dog grooming business. Alison used the cash to purchase business cards, clippers, and supplies. Although she couldn’t have known it at the time, that loan was also laying the foundation for a career helping others feel more comfortable about managing their money.

In this interview, Alison shares the secrets of her success: How she parlayed her loan into a successful business that made her feel like the “richest 14-year-old in the Maritimes,” and how you can use the same strategy – and others – to help your kids understand the fundamentals of borrowing, repayment and interest

Q: Tell us about your grooming business.

A: I got the idea after working for a dog breeder for a number of summers. I knew how to clip and groom poodles, cocker spaniels, and schnauzers and figured I was experienced enough to do it on my own.

We lived in Halifax at the time and I remember feeling very grown up at having my own customers! The business was so successful, I paid off the entire loan in two months. In fact, I kept it up for many years, until I got a job at an animal hospital. It is worth noting that I took a cut in salary when I accepted that job.

Q: How can parents teach kids the basics of borrowing and paying interest?

A: Interest is one of the hardest concepts for kids to grasp. I’ve talked to young adults who still don’t understand how it works. This can lead to debts that linger and a lack of understanding about how much things really cost once you factor in the interest and amortization.

So, start by explaining that interest is simply a fee you pay to the bank for the service it provides when it lends you money. It’s really no different from the cost of paying for the services provided by a dentist or mechanic. Except, of course, that interest will continue to accumulate until the debt is repaid.

In my case, Dad didn’t charge me interest per se. Instead, he had me wash his car once a week all summer. It was one of those big, old V8s so it took quite a while. In other words, he definitely got his money’s worth!

Q: How do you decide whether or not to lend your kids money?

A: That depends on what the loan is for. Don’t lend money as an advance on an allowance. That’s like rewarding your kid for poor budgeting and/or reckless spending.

Do lend money to help your child reach a worthwhile goal: Something the two of you have discussed, the child has researched, and will add some kind of legitimate value to his life such as a computer or a new freeride bike. As you can imagine, I also advocate loans to create summer work!

Before lending any money, be sure the child has saved at least 50% of the amount needed. For less expensive items, such as an MP3 player or a new snowboard, 75% is a better figure. This is crucial because you want to instil the concept of “save first, buy later.”

I suggest making the duration of the loan quite short – six months or less. And finally, make it clear that if a payment is not made on time, there will be a penalty.

Q: How do you keep track of the amount borrowed, the amount paid back, and the amount of interest?

A: A simple spreadsheet is an easy way to do this. Pick a specific loan repayment day each week or month. On that day, show your child her current balance, interest incurred, and payment due.

As she pays down the loan, she will realize that the amount of interest she owes will also decline. This is an opportune time to point out that, just as with Mom and Dad’s mortgage, the more quickly a debt is paid down, the less interest you will pay.

Q: Any other ideas to help kids (and parents) sharpen their borrowing skills?

A: I love the idea of turning the tables on your kids and borrowing money FROM them! This can work particularly well with younger kids or those who don’t yet have the math skills to grasp the concept of interest charges.
Try to make it as legitimate a request as you can. For example, if you have to pick up a few groceries on the way home from work, ask your child if you can borrow $10. Tell her you will repay the loan in one week along with a bonus payment (the interest) for the convenience of lending you the money. The two of you can then negotiate a fair amount of interest – just enough to teach the concept.

I must warn parents: kids LOVE this game because it seems like easy money. So you probably don’t want to play it too often!


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