How we make, keep and use money has evolved tremendously over the last three decades. How do we continue to teach our children about money in this changing landscape? Family and children's financial expert Neale Godfrey tackles the subject in this op-ed.
The world seemed much less complicated in the 1980s when I pioneered the topic of teaching kids about money. By and large, consumers of that time used physical coins and bills to make purchases; digital currency in the form of credit cards was in its infancy. Today, the financial world is digitized as more and more consumers use credit cards, debit cards and mobile devices to make everyday transactions. What will money look like in 20 years, when my grandchildren are grown up? They may think that physical money is something only to be collected, like rare books. So, how do you teach today’s kids about money in the digital age?
As opposed to when my kids were young, the current generation of kids is extremely comfortable with the virtual world. The problem is that the virtual world, when it comes to money, can become the real world almost seamlessly. If you want to see the hazards of confusing the virtual world of gameplay with the real world of money, look at the online gambling activity among young people.
To make the lessons real, you need to start with real money and work your kids into the online world slowly. You know your kids best and you are the best at determining when they will be ready for these lessons. What’s my rule of thumb? By the time kids are five years old, they should be working with my allowance system and open a savings account.
Explain to your kids that real banks hold both real and virtual money. Tell them that an adult can open an account. I’m still in favor of a trip to a physical bank, allowing your kids to deposit real money into a joint savings account.
What are they saving for? Discuss that both real and virtual money will allow them to buy things, with your permission. You know that I am a proponent of having kids earn their own money, so ideally the money they have deposited is from their earned money. This helps them to start bridging their real work, which yielded real money, with how it goes into the bank and becomes electronic. Let’s face it; it’s a tough concept for even intelligent adults to grasp.
From there, the virtual world can take over. As soon as the savings account is established, go online and let the kids see their deposit. This will help them make the connection between the real money they deposited and the balance they see online.
After your kids have mastered the savings account, the next step is to set up a checking account and allow your kids to use some of their spending money. By age seven, they are ready to understand electronic spending. Again, this involves a trip to a real bank branch. After the account is established (jointly with the parent and child), let them go online with you to see how their money is listed in the checking account.
Make sure that you have ATM access to further reinforce that virtual money can become real money. Take them to an ATM and allow them (with you by their side) to withdraw some money. It’s a great time to explain what fees might be involved. The bank is providing a service that must be paid for; the ATM needs to be serviced by real people, who load the machine with real cash. Also, explain that each person who has ATM privileges gets a secret PIN number that allows them to deposit and withdraw money from their specific account. They should memorize their PIN when they get older and never share that number.
As soon as you can get to a computer, go online to show the kids how that withdrawal and the fee was subtracted from the checking account balance. Even let your kids check the math to make sure it is correct.
It’s time to write off checks
It’s fine to show your kids how to write a check, just so they know. The truth is that this is a disappearing life skill, which they may not need as they grow up. The Federal Reserve, as far back as 2012 admits, “Over the years, payments have become increasingly card-based.” Even the U. S. Treasury Department stopped mailing checks to Social Security recipients. Now they get their monthly money via direct deposit or on a debit card.
The next step is to teach the concept of “finite.” I love debit cards because they do just that. Obviously, it works that way with a checking account, but the world of cards is still real until we perfect the fingerprint and retina scan technology that will become commonplace for our grandchildren.
Explain that a debit card may look like any other plastic credit card, but the bank makes you have money in your account in order to use it. In fact, you can only use your money; you can’t borrow any that you don’t have. A debit card is a convenient way to buy things instead of having to use cash. It’s interesting to note, that in most cases, people seem to use their debit cards for small purchases. The Federal Reserve noted that “debit cards held the largest share of payments by number but the smallest share by value.”
The idea of making purchases with a debit card can be introduced when your child is in middle school. There is one that I love and work with called, Greenlight. Parents “load” their kids’ cards, but have to “green light” or approve purchases before their kids can buy things. Make sure that your kids’ earned money goes on their debit card before they hit the mall or all of the online sites that are “calling” out to them.
We live in an exciting new digital world, but it’s our job as parents and grandparents to prepare our next generation for how this new world influences them. I don’t care how the money looks or how it is created or how it moves. Money is about teaching your values and life skills… nothing more, nothing less.