As they grow older, your child might start to wonder how money got its worth and where it comes from in the first place. I think valuing currency is a concept you can save until your children have the right mathematical skills to make sense of it. Fortunately, simple books provide great anecdotes around teaching children about money, doing a great job of explaining things like the United States Treasury and the design of dollar bills.
Children’s Money Books
David Adler, Money Madness
Kathy Furgang, National Geographic Kids Everything Money
Betsy Maestro, The Story of Money
While this is all great knowledge to have, physical money isn’t the only kind your child sees around them. It’s rare these days that I make purchases exclusively in quarters. In fact, it’s becoming rare that I make purchases in cash at all. I have many other options available to me: checks, ATM cards, debit cards, credit cards, and electronic payments among them. Your child needs to know what all of these things are.
Checks are not a terribly difficult concept to make accessible to children. Checks are just IOUs, a written note asking to get money out of your bank account, like a permission slip for your money to go to someone else’s bank account. The slips are personalized; everyone has unique checks with their name and the number of their bank account on it. If you want to send someone money from your bank account, write a check and give it to them. Then, they give your check to their bank and your money goes into their account. Makes sense, right?
I have heard of parents creating their own checks for their children to use while their children were still banking with them. This is an easy way to practice getting money in and out of an account in a more advanced way than just grabbing quarters out of a piggy bank yet keeps you from having to hand out official Bank of Mom and Dad debit cards.
Debit Cards and ATM Cards
Your child has probably seen you using a card to either make purchases or withdraw cash from an ATM. You can explain to them that a debit card is something that usually comes with opening a checking account, and that it’s a lot like a checkbook. It works just like a check but saves you the trouble of having to carry around a checkbook and write checks out. You can use your debit card to get money out of your account via ATMs or to buy things at stores. Point out to them the little MasterCard or Visa logo on the card. You can also explain that an ATM card is like a debit card but that usually you can only use it to get cash at ATMs (hence the lack of the MasterCard or Visa logo).
In financial education literature, it’s surprising what a hard line most experts take on introducing credit cards to children. Many advocate never giving children a credit card, whether they are four years old or twenty-two. Some of them don’t believe in credit at all. I see all the dangers inherent in credit cards—most obviously, ending up in terrible credit card debt. I also understand why most children do not need credit cards. But credit cards are a fact of life, and used correctly, can be a great tool. Why hide from reality? I suggest that you teach them how to use this tool properly. Tell them that you must have a good credit rating if you want to do things like rent an apartment or buy a house, and that taking advantage of rewards programs never hurts either.
I also do not think credit cards are dangerous if you have the right education and discipline. You can use a credit card responsibly, paying off the balance every month, and benefit from cash back or points that many cards offer. You should explain and model responsible credit card use to your children so they at least have an understanding of what these magical cards are without actually having one they can use. Remove the mystery so they don’t get themselves into trouble later down the line. The premise that you will save them from bad choices by hiding all dangerous things is absurd—you need to educate them rather than keep them in the dark.
First, make sure they know the difference between a debit card and a credit card. If you use a debit card, the money is automatically taken out of your account when you use it. If you use a credit card, a bill comes at the end of the month and then you pay it with money from your account. You can even explain to your child that this is where people get in trouble. Debit cards do not let you spend more money than is in your account—but credit cards do. Some cards also don’t make you pay at the end of the month, so it is kind of like you are borrowing money from the credit card company. As long as you pay your bill in full each month, you will not be charged interest for the short window between your purchase and paying your monthly bill. But, if you carry a balance, just like you have to pay a fee in interest when you borrow money from the bank, you pay a fee and interest. The problem is, that fee is very, very high for credit card borrowing—so you have to be careful and always pay your monthly bill. Investopedia provides a great beginners guide for those who may be skeptical or wary of getting your child their first credit card.
Sometimes I like to buy things on the Internet. While I could use my debit or credit card to do so directly, I get a little nervous typing in sensitive information down a black hole of 1s and 0s. We all know how common credit card fraud has become. Fortunately, services like PayPal exist to make money transfers easy while helping protect your assets.
Your child will probably not be doing a whole lot of shopping on the Internet (that wouldn’t be a great habit to teach). But if you do, they will probably see the packages arriving from Amazon and wonder how you paid for them. You can explain the dangers of online shopping and the steps you take to protect your information. Perhaps you use something like PayPal, or maybe you review your statement often to ensure that nothing is being bought with your information. The idea that people can steal this information from you and use your money is relevant to children whether or not they are doing online shopping. This ties back to the idea of discretion. Make sure they understand that their financial information is private. It may be a good time to teach your children about identity theft and criminals who prey on financial information – while you don’t want to scare them unnecessarily, fraud is a risk and element of their financial education.