How to introduce your kids to invisible money

By Josephine Lim at www.creditcards.ca

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All the signs are pointing toward a cashless -- or mostly cashless -- future. As more and more companies embrace mobile payment systems and online currencies gain notoriety, people have adapted to cashless payments.

But if you have kids, don't switch to all plastic, all the time just yet. It's best to first expose kids to cash in order to teach them its value before letting them handle invisible money. Then, gradually introduce them to plastic.
 
Cash first
Robin Taub, a CPA, chartered accountant and author of A Parent's Guide to Raising Money-Smart Kids, says teaching your children to pay with physical cash will feel more "real" to them than swiping a card. In other words, it'll make more of an impact if they have to physically part with their hard-earned money at the checkout.

Having children using cash first helps them equate a value to the number they see on a bank machine screen, adds Brian Betz, a counsellor with Money Mentors.

Expose your children to counting cash, calculating change and saving money in a piggy bank. This will build good habits for when they graduate to a real bank.

Next step, debit cards
Once your child sets up a bank account, a debit card is a good first step toward "invisible money." Unlike credit, a debit card draws funds directly from your child's account, says Taub. Introducing your children to debit comes with many teachable moments. Children can learn how their money is stored in the bank, how ATMs work, and how to check and understand their balance.

While there's no set age to give your child a debit card -- it all depends on your kids' maturity levels -- Taub says you may want to consider debit for your kids once they are 9 or 10 years old. They should be able to comprehend that they can only spend what is in their account, and that using a bank account is similar to the piggy bank -- once you empty it, there's no money to use until you fill it up again, says Betz.

It's also a good idea to have them earn their money -- give them a weekly list of chores they must complete before collecting their allowance, or whatever works for your family. The sooner your children understand that they can't get something for nothing, the better.
"Talk with [your kids] about it, make sure they understand and know what they're doing," says Taub. "You need to maintain some oversight as well, you can't just let them loose -- you do need to keep an eye on things."

When you set up the account, make sure your child understands their debit card's daily and monthly transaction limits. Teach your child about the consequences of overdrafting (and explain what overdrafting is). You may also want to impose your own rules and limits -- perhaps you want them to put at least $10 a month into a savings account, or you don't want them to spend more than $20 a month on entertainment.

While you should monitor your child's account and spending, you don't want to do so secretly. Be open about how often you will look at the account and what you'll be looking for. You don't want to encourage your child to be secretive about money.

BMO, RBC, CIBC and TD Canada all offer bank accounts for children.

Finally, introduce credit
After your child has gotten a handle on debit card use, along with good saving and budgeting habits, you can introduce them to credit.

"Unfortunately, so many young adults get thrown into [credit]," says Kelley Keehn, a personal finance expert and author of The Prosperity Factor for Canadian Kids. "They don't have any idea that a $1,500 limit is not $1,500 bonus money. Get them to understand that it's a tool to be respected and paid back and it's not found money."

Taub agrees that it's a good idea to introduce credit at a younger age, rather than waiting until your child is headed off to university. If your kids are young, Taub says, you can take away their card and go back to a cash system until you feel they're ready to try again. You don't have that option with an older teen.

A good first step is creating a mock credit card system where Mom and Dad act as bankers. Your mock system should follow rules similar to using a credit card, says Keehn.
 
For example, if your child has his eye on the new video game that just came out, but doesn't quite have the money for it, offer to buy it for him. Explain that he has a certain amount of time -- say, a month -- to earn the money to pay you back for the game. If he doesn't pay you back on time, increase the amount he owes you (very slightly, so as not to overwhelm him) each day until he can pay you back in full. Also, explain that the longer it takes him to pay you back, the less likely you are to offer him a loan again. Thus, you teach him how credit and interest work, and how not paying back in time not only costs him more, but hurts his image.

It's important to structure the system for an item that's beyond your child's financial means, as lessons of credit and borrowing help them understand the process of repayment, the trade-off of purchasing one item over another, and its effect on future purchases.

Share your money mistakes and the consequences you experienced, adds Betz. You'll show them that no one is perfect when it comes to money management, and your child can learn from your mistakes.
When you decide it's time for your kid to get a credit card, explain how minimum payments work and how payment history determines credit score (and why a good credit score is important). When your child begins to use the card, go over the bill line by line, discussing each transaction. Teach them to look for erroneous or fraudulent purchases.

Be prepared before you dive in
There are risks involved with letting children use invisible money, but it's important parents don't bail them out. Kids can't learn from the consequences of their actions if they expect mom and dad to help them, says Betz.

It takes time and practice to instill good money habits in your children, and for parents to do it right, they need to be aware of their own financial habits.

"You're the role model, they're going to mirror your attitudes and values and don't think you're going to be able to pull one over them," he says. "Be prepared for those conversations."