History, English, Math and…financial literacy? It might seem odd, but the ins and outs of navigating financial adulthood are becoming increasingly important to the education of America’s youth, and for good reason. The extensive overleveraging and risky lending practices that helped lead to the Great Recession clearly illustrate the need for increased financial education, as does a study conducted by the FINRA Investor Education Foundation that showed young adults to be far less versed in fiscal matters than past generations. While public schools and federally funded programs like the National Financial Challenge and the FDIC’s Money Smart curriculum are taking up the cause to a certain extent, we all know that some of the most important teaching is done at home. That’s why it’s a good idea to begin a practical financial training regimen when your child hits high school.
Practice makes perfect
One of the best such programs entails giving your child experience using the various types of financial products they’ll have to manage during adulthood as well as requiring that they pay for certain monthly expenses with an allowance that you provide. By simultaneously increasing your child’s allowance over time, requiring that they pay for more of their own things, and exposing them to riskier financial instruments, you will gradually wean them off your wallet and ensure that they’re able to handle the responsibility that comes with financial independence when in college.
Get started with a prepaid card
A prepaid card generally represents the best starting point for four reasons:
- Prepaid cards provide the same utility as checking accounts, minus the physical checkbook
- The implications of misusing a prepaid card are less serious than those that come with improper checking account management, as you cannot overdraw a prepaid card
- Prepaid cards offer online account management, thereby allowing you to review your child’s purchases with them
- Prepaid cards are the fastest growing electronic payment method, according to the Federal Reserve.
In other words, prepaid cards give young people a sense of financial independence as well as valuable experience using the tools of everyday banking in a low-risk environment.
Ok, but which one to get? According to a Card Hub Prepaid Card Report, the American Express Prepaid Card is the offer best suited for teaching financial literacy because it only charges one fee ($2.00 per ATM withdrawal, beginning with the second withdrawal you make each month). Contrast this with the Suze Orman Prepaid Card , for example, which charges 20 different fees, and it’s obvious that the Amex card is the best way to kick-start your child’s financial education.
So load your child’s allowance onto an Amex Prepaid Card every two weeks, require that they pay for certain leisure activities (e.g. trips to the mall or the movies), and make it clear that you will not be providing any additional cash until the next “pay day.” This will help hammer home the importance of budgeting and the true value of money.
Graduate to cash and checking
Once your child gets a pretty good handle on prepaid card use, you can progress to doling out a cash allowance on a monthly basis, while also requiring that they pay for more of their own expenses. This will help stress the significance of keeping track of tangible currency and necessitate even better budgeting than with a prepaid card.
Again, once mastered, you take the next step to opening a checking account under your child’s name and opting-in for the ability to overdraw it. Before depositing funds and unleashing them with the account, make sure to stress the importance of account balance awareness because if the account is overdrawn, you’ll not only have to move back to the cash-allowance stage of financial education, but your child could also be putting their ability to qualify for another checking account down the road at risk.
See if your child can pass the test
After checking account use, it’s time for the final exam of fiscal literacy: credit card use. You can either make your child an authorized user on your account or help them open a student credit card under their own name. Many people think that the new credit card law (the CARD Act) prevents kids under the age of 21 from getting credit cards, but it really only necessitates that they either have a cosigner or the independent income/assets needed to make monthly minimum payments.
By this time, your child will not only be prepared for financial adulthood, but you will also feel a bit better about them heading off to college. Having a financially literate child won’t keep you from missing them, but it will give you the peace of mind that the infamous pizza party for the entire dorm floor won’t result in them getting into debt or seeing their credit score fall before it even has a chance to rise.
This article comes from our friends at Card Hub, a leading marketplace for credit cards, prepaid cards, and gift cards.