We teach our kids proper values. We teach them how to read. We teach them how to tie their shoes. However, many parents don’t effectively teach their kids how to manage money.  

A lack of financial literacy can be seen in the risky spending and ill-advised loan management that people have engaged in during these last few years.

These bad practices helped lead to the Great Recession, but many of us still have not learned our lesson. 

As optimism about the nation’s economy has begun to return, consumers have reverted back to old spending habits and have once again begun accumulating credit card debt. Perhaps if our parents had better prepared us for financial independence, we would not be in such an economic predicament. We must educate our children about financial responsibility so that future generations may avoid the hardships that we have endured.

But that might be easier said than done.

Should you consult parenting books and have heart-to-heart conversations with your kids? Maybe, but your children might just tune you out. How about printing helpful articles about personal finance? Perhaps, but they might go unread.

Why not simply educate your children through practical experience? After all, you don’t teach kids how to ride bikes by talking to them about it or reading them books; you throw some training wheels on and place them on the seat. In fact, approaching the financial education of children as if you are teaching them to ride a bike is an excellent idea. Teach them gradually about money management and only take the training wheels off when skills have been mastered.

In this analogy, prepaid cards are like the training wheels. By giving children prepaid cards, you allow them a sense of financial autonomy while retaining the ability to monitor how much money they spend and where they spend it.  Thus, you can explain to them why their financial choices are wise or why they are not.  Your kids will also need to learn how to budget because you will load a certain amount of money on their cards biweekly and will hold them responsible for exhausting these allowances or wasting funds on certain usage fees that might be associated with their accounts.

Once they have mastered prepaid card spending, it’s time to take one training wheel off, so to speak, and provide your kids a monthly cash allowance.  This will give them added financial independence because you will not be able to track their spending.  Similarly, they will also have to learn how to budget over a longer period of time.

When they have demonstrated proper spending habits with cash, it’s time to take the training wheels off completely. However, in terms of the analogy, you will still be gripping the handlebars, providing support in case they lose balance. At this juncture you should try to open checking accounts in your children’s names. You will have to co-sign in order to get such accounts, but you can use the fact that you are doing so to make it clear how careful your children must be with their spending. Use of a checking account and a debit card will serve as a good test of a child’s progress because checks can be bounced and accounts can be overdrawn. If such things occur multiple times, you can also simply cancel an account and move back to cash.

However, if children demonstrate that they can handle the responsibility of checking, you can progress to the final step of their training, getting them their own small lines of credit as authorized users on your credit card or co-sighing for student credit cards

This will help kids learn how to manage credit by spending within their means and paying in full every month.  It’s like you’re taking your hands off your children to see if they can ride, while remaining right beside them in case they wobble.  If they do, you can catch them, but if they keep falling, it might be time to regress.

Ultimately, if you follow this game plan, your kids will leave the nest in possession of the necessary tools to manage their financial lives responsibly. This will make their adjustment to the real world smoother, and will provide you peace of mind. Additionally, if widely practiced, it will benefit the country’s economy as well. So make teaching your kids about money a priority and we will all be better off.

 

This article was written by Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards.