Little-known fact: Layaway still exists. After falling out of favor in the late 1980s with the advent of cheap credit, the popular installment plan used to buy a generation of sweaty teens Atari 2600s made a comeback during the Great Recession. As credit got tight, layaway offered struggling consumers a way to buy items over time and struggling retailers a way to move inventory. And while the pay-each-week system isn’t right for every shopper ⏤ in fact, many financial experts recommend against it, advocating instead for saving the full amount before you buy ⏤ it has a clever secondary benefit for parents. It’s actually a really smart tool for teaching kids about financial management, especially the real-world fundamentals of making bigger purchases like cars and homes.
No, kids don’t need to buy every bike, action figure, or video game they want on layaway. Filling up that piggy bank before strolling into the store is always the best financial strategy. But walking a child or teenager through the layaway process for one or two purchases can improve their financial literacy. Not only does the process teach them how to budget and save for a down payment, it exposes them to the fees and fine print of financial agreements, offering an invaluable education in thinking twice before you buy. With that in mind, here’s what you need to know as a parent to use layaway a financial teaching tool.
How Does Layaway Work
Modern layaway works much as it has since the Great Depression: Customers reserve a product in the store, put down a small deposit, and make payments (usually weekly) until it’s paid in full. Unlike using a credit card, however, the item stays in the store until the final payment is made ⏤ usually for a period of up to 60 days. In addition to the down payment ⏤ which is either a set amount or between 5 and 20-percent of the item’s price ⏤ there’s often a service fee for holding the item, around $5 to $10, and a cancellation fee if you change your mind or can’t come up with the cash. And note, not all the product on a store’s shelves (or website) are eligible for layaway.
Which Stores Still Offer Layaway
While most small stores don’t use layaway (and never have), a number of big-box retailers do. They all have different rules, fees, and contract lengths, however, so be sure to read the fine print before choosing one in which to conduct your kid’s training. That said, here’s a short list of stores where layaway is still offered:
- Walmart (From September to December.)
- GameStop (Only available during the holidays.)
- Big Lots
- Burlington Coat Factory/Baby Depot
- TJ Maxx/Marshalls (Only select stores.)
Layaway’s Potential Pitfalls
Again, there are potential drawbacks to using layaway, and parents should keep them in mind.
First, because of the contract fee, your child will pay more for the product in the end than if you bought it for them, and let them pay you back. Unless you use a no-fee layaway program, there’s no getting around that. Equate the contract fee to closing costs on a house or the tax, tag, and title costs associated with buying a car, however, and you’re teaching them that certain products simply come with accompanying fees, not to mention the importance of being a smart shopper and finding the lowest ones. You can also divide the fee over the course of the payment schedule and teach them about credit-card interest ⏤ because that’s essentially what it is, a very high-interest rate tacked on to each week’s payment.
Second, there’s always the chance the toy or video game goes on sale after they put it on layaway, in which case they’ll miss out on the savings. Again, it’s a drawback that bothers accounts and financial planners, who hate seeing any money left on the table, more than it should you. Interest rates drop after you buy a home, as do car prices. It’s a fact of life. It’s better to miss out on the savings in order to reinforce the lessons you’re teaching them than be caught in a scenario where the price drops and you’re guilted into buying it for them. Even if they continue to save and buy it from you, that’s not how the real world works.
Layaway as a Teaching Tool
That said, the benefits of using layaway to teach kids about financial responsibility far outweigh the negatives. Here are eight worth noting:
- It reinforces budgeting basics.
Before you walk your child up to the layaway counter, it’s important for them to figure out if they can even afford the item. How much money do they make each week in allowance or by doing additional chores around the house? Have them take the total price of the product, add in the fees, and divide by the number of weeks in the layaway contract. Do they make enough to cover the weekly payment? And if so, how much of their budget will it eat up? It’s important that they understand how much money they’ll be left to work with after making the layaway payment.
- They have to save for the down payment.
If ever there was a small-stakes equivalent to buying a home or car, layaway is it. No matter what product they’re buying, it will include paying a down payment (be it a flat fee or percentage of the price) before the process can even begin. Getting the child to save that 10-to-20-percent down payment is a big deal. Not only are they making a value judgment about how much they want the layaway product ⏤ would they rather buy another toy that week or put the money toward the down payment ⏤ they have to decide what amount to save each week, as well as how long they are willing to wait for the item.
- It forces kids to save a specific amount of money each week.
Similarly, even if they aren’t saving the full amount of the item before making the purchase, layaway forces the child to save a set amount of money each week ⏤ money that they might normally spend on something else. And teaching a child to save money, and more importantly, to want to save money is one of the most important life lessons a parent can impart.
- They get to pay bills.
Once a week, your child will have to withdraw money from their piggy bank or mattress, put it in an envelope, and hand it to a cashier behind the layaway desk. Not only that, they’ll have to do it on time every week, or be hit with a late fee. Congratulations, you just taught them how to pay bills.
- They learn the real world ramifications of missing a payment.
If you buy a scooter for them and they miss a payment, no big deal. Sure, you can impose some type of interest or fee but more likely than not, you won’t, and the child will simply have to wait a little longer to pay it off. If they miss a layaway payment because they spent money on something else, they’re going to be hit with a real fee ⏤ and one that they’ll be forced to cover out of either their savings or remaining allowance. It should only take one missed payment before a kid learns the hard way to pay their bills.
- They have to read the fees and fine print.
Because layaway plans vary by store and come with different fees and downpayment structures, more financially savvy kids can learn the basics of comparison shopping. If the product they want is sold at more than one store, where will they get a better deal? Will they lose all the money they paid in if they change their mind and cancel the contract? How much will they get tagged at each store for missing a single payment? How about missing the final payment? Before they decide to put an item on layaway, have them do their due diligence and calculate the most advantageous plan.
- Layaway lets them set and complete a savings goal.
Yes, they can learn the same lesson by saving up their money for three months, walking into a store, and buying a new video game, but it’s just as easy for them to change their mind after two weeks and blow all the cash on baseball cards. Using layaway forces them to set a savings goal ⏤ the price of the product ⏤ and stick with it, otherwise, they could be out a lot of money.
- It teaches delayed gratification.
And finally, the single most important lesson it teaches kids is to live within their means and to be comfortable waiting for a reward. It reinforces the importance of staying out of debt and the long lost art of delayed gratification, the benefits of which studies suggest extend well beyond a person’s financial well being. By teaching children at an early age to value savings and work hard for what they want, you’re setting them up for a lifetime of success.
- It reinforces budgeting basics.