A good friend of mine has two kids, a daughter who is a senior in high school and a son who is in the eighth grade. This friend is also something of a planner, and just the other day, she said to me, Odysseas, I want to get Charlotte [we will call her that for the purpose of this article] a credit card for when she moves away to college next year. Which one should I get her? This is a common question for parents to ask. However, it is inherently flawed.
Parents often simply send their children off to college armed with student credit cards, which they are told to use only in case of emergency. Too frequently, however, these children misuse their newly found spending capabilities. Why? Because they were never taught to effectively manage their finances. Considering that we teach our kids nearly everything else, from how to tie their shoes to how to drive a car, why not teach them the ins and outs of personal finance?
Therefore, my response to my friend’s inquiry was: I’m glad you asked me early because Charlotte got some work to do before you set her loose with a credit card.
You see, learning fiscal responsibility is like learning how to ride a bike; you have to start with training wheels. The training wheels of spending are prepaid cards. Thus, I told my friend to get a prepaid card for Charlotte as well as for her son, John, [again, not his real name] because he is at an ideal age to begin learning how to manage money. Prepaid cards, I told her, are great starter spending vehicles given that they allow parents to keep track of how much money their kids spend and where they spend it. Additionally, parents can teach their kids how to budget by only loading money on their prepaid cards biweekly.
After Charlotte and John have demonstrated the ability to spend with prepaid cards, I told my friend to take one training wheel off, so to speak, and give them monthly cash allowances. Cash gives kids more spending freedom because parents can’t monitor where it is used. In addition, doling it out monthly will force your child to budget over a longer period of time, instilling discipline in their spending.
Once this discipline is been hammered home, parents should take the other training wheel off yet keep hold of the handlebars. For my friend, this will include opening checking accounts in Charlotte and John’s names. Checking accounts serve as apt indicators of children’s financial progress because they can be overdrawn and checks can be bounced. If either occurs multiple times, the accounts can also be cancelled.
If they don’t, parents should make their kids authorized users on their credit cards or get them their own starter credit cards. These moves amount to a parent letting go of a child’s bike while remaining nearby in case he or she loses balance. They will also teach kids to spend within their means and pay their bills in full each month.
Any child who completes this gradual financial learning process will be well prepared for financial autonomy. Since my friend has begun this process with Charlotte and John, they are well on their way to being prepared for the real financial world. After reading this, you are also ready to set your kids on a similar path. Ultimately, if every parent teaches their children how to properly manage their money, we will all be better off because such widespread financial literacy should serve to lessen the pervasive credit card misuse and risky lending that helped lead to the Great Recession.