Teaching your children money management is a careful balancing act. You need to give them the tools to learn budgeting, saving and the simple mechanics of using plastic. On the other hand, you don't want them to incur steep fees or tank their credit score.
Here's a game plan that will prepare your child for financial adulthood, marked by the four accounts everyone should have before they graduate high school.
Age 5 (or younger): Savings Account
A savings account is the safest product you'll open for your child: The money will grow, and it's unlikely your little one will incur any fees. You'll have to open the account in your kid's name, but most banks will waive monthly service charges until he turns 18. Keep an eye out for banks and credit unions that offer junior savings programs and other incentives.
This is the modern version of a piggy bank, and a great teachable moment: You can convey to your child that banks are safer than storing cash under the bed, and they'll actually pay him to keep his money there.
Age 10: Custodial Account
When your child is a little older, it's time to introduce her to the stock market. The intricacies of risk and return will probably be over her head (the same is true for most adults), but this will get her comfortable with the idea of investment accounts and encourage her to ask questions. Set up a custodial account with yourself as the guardian. You'll run the account until she turns 18, at which point she gains full control.
It's important that this be her account. Keep the balance small enough that if you lose the whole amount, it won't affect her college prospects (you should keep a separate 529 account for her educational needs) but let her play around with buying and selling stocks – under your supervision of course. Better to introduce these concepts now than to have her make her first investment decision when she gets a 401(k).
Age 13: Debit Card
When your child starts high school, it's time to give him the power of plastic. Up until now, he's been relatively sheltered. He can't do much damage to an investment account that you supervise or a savings account he can only contribute to, not withdraw from. A debit card does carry some dangers, particularly overdraft or out-of-network ATM fees. Be sure to choose a credit union that refunds out-of-network surcharges – or explain the importance of using the right ATM and let your kid learn – and opt out of overdraft protection.
When you open the account, bring your child with you. Explain to him the different overdraft options and what it means if he runs a negative balance. Go over the monthly statement with your child, and use a financial service like Mint.com to receive alerts if your child incurs an overdraft or out-of-network ATM fee. Discuss these charges and ways to avoid them. The experience of using a debit card will prepare him for an increasingly cashless world.
Age 16: Credit Card
Last, we have the dreaded credit card. Used wisely, it can build up your child's credit history and set her up for more affordable loans in the future. Used incorrectly, it can do serious harm to her FICO score and debt load. And here's the paradox: The only way you can prove yourself creditworthy is by putting yourself in a position to make mistakes, and then not make them.
There is a way around the paradox. Co-sign two credit cards in your child's name: one with a low limit of $100 or $200, and one with as high of a limit as the issuer will give you.
Stick the high-limit card in a drawer. Don't use it, and don't let your child use it. This one is just for raising her credit score.
The low-limit credit card is a teaching tool for your child's use. Explain the consequences of not paying the balance in full every month, and make sure she has enough money in her savings account to cover any slip ups she might have.
Don't come to her aid: This is how she'll learn. She will eventually need to use a credit card, and this two-card system will ensure that she'll get a good credit card offer and will know how to use it.
Anisha Sekar is the chief consumer advocate at NerdWallet. Read more of her work on the Money-Saving Tips blog.