These days, many of us hardly use any cash to pay for things. After all, credit and debit cards offer convenience, rewards, and various degrees of insurance and fraud protection.
But how do you teach your kids about money when you don’t use cash on a regular basis? Here are some ways you can teach them valuable personal finance skills when you don’t use cash:
Give them an allowance – There are pros and cons to giving your child an allowance, but one of the “pros” is that your child can learn some important real-life money management skills. Your child will learn that she can’t afford everything she wants, and the joy of delayed gratification from saving for something big. Your child can also make mistakes, such as buying something that only holds his attention for a few minutes. When tied to chores, an allowance can also teach a child about earning money as opposed to just receiving it.
Give them a budget – With older children, who tend to have expensive tastes, consider giving them a budget. For example, tell them they have a certain amount to spend on back to school clothing – and then give them the freedom to spend their entire budget as they please, whether it’s on a few pieces of brand name items, or a closetful of less expensive items. You could also give them the option of earning extra money to boost their budget by doing certain tasks or fulfilling certain goals. This idea works for many different types of purchases, such as the monthly cell phone bill (your child pays any amount over a monthly budgeted amount), or individual one-time costs such as a cell phone or tablet.
Explain how credit and debit cards work – If you’re not using cash, then you’re almost certainly paying with a debit or credit card. So when you use it, explain how you’re paying for your purchase: When you slide the magnetic strip on the back of the card through the machine at the store, the machine reads the bank information stored in the strip. The computer system then sends the transaction information to your bank, which adds the charge to your credit card bill or deducts the money from your checking account. You can further explain how banks earn interest on credit card charges if you don’t pay off your bill in full each month, and emphasize the importance of intelligent credit management. If you’re using a debit card, explain the risks of overdrafting your checking account, and the concept of bank fees.
Open a savings account for them – Opening a bank account in your child’s name can give him a real-world taste of money management. At a brick-and-mortar institution, your child can deposit and withdraw money, and even learn the power of compounding interest (although the current low interest rates unfortunately provide little incentive to keep saving).
Open an investment account for them – Opening an investment account for your child won’t give her the same hands-on experience as a bank account at a brick-and-mortar institution. But an investment account can teach your child about risk and reward, and how the stock and/or bond market works. Let your child manage the account with you – explain how you’re choosing which fund or stock to invest in, and share the monthly or quarterly statements that show how the investment is performing. You can even discuss current events that have affected the performance of the investment, which can lead to discussions about broader topics such as unemployment trends and why the parents of several of her friends have recently lost their jobs.
Give them a prepaid debit card – Your child must be at least 18 years old in order to obtain her own credit card. But a prepaid debit card can be a relatively safe way to introduce your child to credit card use, budgeting, and money management. You simply “load” money onto a prepaid debit card, and your child can spend that money by using the prepaid card wherever that brand of card is accepted. Your child will have to plan his purchases, as a transaction for more than the amount loaded to the card will be declined. Most major brands, like Visa, Mastercard and American Express, offer prepaid debit cards, which you can purchase at retail stores. Prepaid debit cards are also sold by many banks.
Make them an authorized user of your credit card – Another option to teach your child how to use a credit card is to make her an authorized user of one of your credit cards. There is a greater risk associated with this option, however, as your child can charge purchases up to the maximum limit on your card, and you will be responsible for those charges.
