Now is a great time to teach your children how to manage money. As lawmakers debate how to reform the nation's banking system and news stories detail the travails of Americans who took on too much debt, parents can use examples in the current economy as a way to talk to kids about the risks of credit.
"Look at all the news stories that show people who have lost their homes from too much debt or are incurring substantial interest charges or who have bad credit and can't get an apartment or job. It's a wonderful way for parents to teach their kids about credit or debt," said Ric Edelman, an author and financial adviser.
But parents may be wary of introducing their kids to credit cards, especially after hearing horror stories of young adults with several cards and thousands of dollars in debt before even graduating from college.
So, is it really a good idea for parents to be the ones introducing kids to credit cards?
The experts say yes. It's important to teach children about credit, as well as cash and debit cards, so they are prepared to handle their personal finances as young adults.
"There's a time and a place for all three," said Jordan Amin, the chairman of the American Institute of Certified Public Accountants' national CPA financial-literacy commission.
"Cash and debit are for immediate purchases, and credit is for a longer-term purchase or an unexpected expense," he said. "A credit card shouldn't be used for discretionary items."
Current events can be used to teach kids about the pros and cons of using cash versus credit versus debit, experts said. Here are some points to keep in mind when introducing your kids to using money.
Cash is king
For younger kids, cash is a good way to introduce them to money. Credit and debit cards are too abstract, Amin said. "Something that's tangible and universal makes it easier to teach them," he said.Cash is especially useful for teaching children about regulating their spending, said Kathleen Gurney, a psychologist and chief executive of Financial Psychology, a Sarasota, Fla., advisory company.
"There's the tangibility issue," Gurney said. "People will tend to spend less money when spending cash than using a credit or debit card because the cash is finite. If you only have $10 cash, you can't spend $30. So for kids, cash is always a great way to teach them to use money more wisely."
Gurney also recommended that parents teach their kids to use less cash than they have.
"Most kids will want to go through all their cash and more," Gurney said. "If they have $10 and want to buy something for $12 or $13, they are always bargaining and trying to get that extra $2 or $3. Teach them to buy something within that $10."
Teaching tools
Credit cards are a reality of life, and parents can help teenagers spend wisely by teaching them about the proper use of cards. And debit cards and prepaid cards can be useful budgeting tools because they can help track spending, experts said."Give them an allowance on a prepaid card and talk with them at end of the month about where they spend money," said Jason Alderman, the senior director of financial education at Visa.
A prepaid card is a great way to teach kids about self-regulation, Gurney said.
"Lack of self-regulation is one of the most significant issues that I deal with in helping people become better money managers," Gurney said.
Gurney suggested parents introduce kids to a card after children learn how to spend cash within limits.
"Once they know how to regulate their spending, they will know how to pay off a card," Gurney said. "If they are off to a good start and have a good experience, these are lessons that will stick to them through life. There are so many people that really don't know how to use credit appropriately, and it's because they never developed the discipline of self-regulation."
Continued: Family money values
