Would you send your child off to college if he or she hadn’t gone through high school and been prepared academically? Probably not. It’s therefore surprising that so many parents drop their kids off on campus thoroughly unprepared for the financial realities of adulthood.
Given this context, it’s no wonder that we have such problems with consumers spending beyond their means, racking up credit card debt and taking out inherently risky loans. However, perhaps if we begin educating our children about personal finance in their formative years, future generations will be able to avoid experiencing their own Great Recessions and the myriad accompanying struggles. How can we do this? Well, you remember teaching your kids how to ride their bikes, right? Just like that.
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Two Training Wheels: A Prepaid Card
You don’t just put children on two-wheelers and let them fend for themselves. Instead, you start out with training wheels. The same concept holds true when teaching responsible money management, and prepaid cards are the training wheels of personal finance. Therefore, the first step in instilling proper financial values into children is for their parents to co-sign for prepaid cards, load a certain amount of money twice a month and allow kids spending freedom.
Having their own spending vehicles gives young people a sense of financial independence. It also forces them to learn how to budget and choose purchases wisely. Additionally, since all prepaid card accounts now have online management capabilities, parents can review their kids’ purchases with them.
One Training Wheel: A Monthly Cash Allowance
After their children master the use of prepaid cards, parents can then progress to giving them monthly cash allowances. This not only provides greater autonomy because parents cannot track cash spending but also presents a stiffer test of responsibility since kids will have to budget for a longer period of time and will actually have to physically manage their money without losing it. This step is tantamount to taking one training wheel off a child’s bike. More balance is now required, but the risks aren’t too great yet.
Two Wheels and Some Hands-on Support: A Checking Account
Once this test is passed, parents can take the last training wheel off their kids’ bikes by opening checking accounts in their names and depositing greater monthly payments into these accounts. This will give kids useful experience writing checks without bouncing them and paying for goods with debit cards without overdrawing their accounts.
[See Your Guide to the New Tax Credits.]
In addition, the higher amount provides incentive for kids to progress to this level and to not regress. Still, though the training wheels have come off, parents should keep hold of the handlebars on their kids’ bikes. If they have trouble using checking accounts correctly, move them back to cash.
See If They Can Ride: A Credit Card
If they master such spending, it’s time for parents to take their hands off their kids’ bikes to see if they can ride. At this point, parents should either co-sign for student credit cards or provide their children with small lines of credit as authorized users on their accounts. Being able to use credit prior to setting off on their own helps young people learn how to spend within their means and pay their bills in full each month in a relatively low pressure environment.
This, after all, is the ultimate goal of parenting: preparing children for the real world so they may flourish and lead happy lives. Therefore, make it a point to teach your children the ins and outs of money management so they will be better prepared for adult life when they set out on their own.
Odysseas Papadimitriou is the chief executive of CardHub.com, a website that helps consumers find the best credit cards, charge cards, prepaid cards, or gift cards.
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