Teach Your Kids a Very Valuable Lesson: Fiscal Responsibility
I can’t get my kids to clean their rooms, how am I supposed to teach them responsible money management? Such is the type of thinking no doubt being employed by parents nationwide because while financial literacy is clearly an important issue, we all know how obstinate, rebellious and unwilling to listen teenagers can be. However, you certainly don’t want your children to head off to college unprepared for financial adulthood, as that’s how pizza parties for the entire dorm floor find their way onto your credit card statement and credit scores get damaged. Parents therefore need to supplement the growing inclusion of financial literacy in government programs and public school curriculums with a little home schooling.
Ok, but that’s surely easier said than done, so how does one go about actually implementing such a training program?
Well, let’s first consider what you want it to accomplish. You’d ideally like to give your child experience using all the different products and services they’ll encounter when financially independent, but in a low-pressure, low-risk environment. In addition, you probably want to instill in them the importance of living within a budget as well as the true value of money.
That’s why the most effective financial literacy curriculum involves gradually
A) increasing your child’s allowance,
B) using different financial products to provide this allowance, and C) requiring that they pay for more of their own expenses.
Step 1 – Prepaid Card Use: Beginning your instruction with a prepaid card presents a number of advantages. Prepaid cards, after all, provide the same utility as traditional checking accounts (except, of course, paper check writing), and cannot be misused since they cannot be overdrawn. They also offer online account management, allowing you to review your child’s spending habits with them in order to help them understand how to avoid unnecessary banking fees.
The best prepaid card for teaching financial literacy is The Approved Card from Suze Orman, according to Card Hub’s 2012 Prepaid Card Report, because it is the cheapest option for what could be considered average teen use – loading around $100 and making two ATM withdrawals and two purchases per month. So load your child’s allowance on this card biweekly (will force budgeting) and make it clear that you will not be providing any additional financial support for things like trips to the mall or the movies. After a few months of responsible use, it will be time to take things to the next level.
Step 2 – Cash Allowance: The value of a cash allowance is simple: Young people can be absent minded, and cash can be easily lost. Giving your child a slightly larger allowance than in Step 1, providing it in single monthly installments, and increasing the expenses for which they’ll be responsible will therefore necessitate more thoughtful budgeting as well as the safekeeping of paper currency.
Again, after a few months without missteps, you can progress to Step 3.
Step 3 – Checking Account Management: This is a big step because improper checking account management (i.e. frequently overdrawing your account or bouncing checks) can make it difficult to get another checking account down the road. Therefore, you should open a checking account in your child’s name and give them the freedom to decide between being on the hook for overdraft fees should they occur or not having the ability to overdraw their account in the first place.
You should also progress to giving a larger allowance, depositing it in your child’s account every other month, and once again ramping up the expenses for which they’ll be personally responsible. After checking account use is mastered, it’s time for the final exam.
Step 4 – Getting a Student Credit Card:
Many believe that people under the age of 21 cannot get credit cards, but the personal finance reform law that took effect in February 2010 (the CARD Act) only necessitates that students have the independent income or assets necessary to make minimum monthly payments. Since these payments are usually around $15, this shouldn’t be a problem for any young person with a part-time job. You could also co-sign to get around this requirement.
Either way, make sure that your child gets a student credit card and is aware of the potential gravity of missed or late payments as well as how expensive interest can be. A credit card is a necessity because it reports information to the major credit bureaus on a monthly basis and is therefore the most efficient credit-building tool available. One’s credit score, as I’m sure you’re aware, strongly influences their loan rates, insurance premiums, job prospects, and ability to lease a car or a home.
Once your child has mastered credit card use in addition to prepaid card, cash, and checking account management, I’m sure you’ll feel much more confident in their ability to not only spend wisely when at college, but also to tackle common financial obstacles.
This article comes from our friends at Card Hub, a leading online destination for credit card offers and personal finance education.