October 2022

How can I teach my kid to save and budget with their allowance

Do you want to teach your kid the noble art of saving and budgeting using their allowance as a superpower? To add a little spice we’ll cover it super-hero style. Maybe you can use some of it to inspire your little one.

Why It’s Important

  • Money Magic: Learning to manage money is like discovering the ultimate magic trick. You want them to be the next Houdini, not the disappearing dollar kind.
  • Avoiding Future Money Fails: Teach them now, so they don’t become the “broke magician” in their adult years. Financial magic wands won’t cut it.

Getting the Ball Rolling

  • Allowance Avenue: Start with a regular allowance. It’s their superhero suit, and it comes with responsibilities.
  • Budget Sidekick: Teach them the mighty power of budgeting. Create spending categories for their allowance. It’s like having different gadgets on a superhero utility belt.

The Thrilling Adventure of Saving

  • Super Savings Goals: Help them set saving goals. Want a new video game or a sparkly unicorn toy? It’s their treasure to hunt.
  • Saving Stash: Get them a cool piggy bank or a savings jar. It’s like their secret lair to stash their savings, away from pesky villains (aka spending temptations).

Budgeting for Justice

  • Needs vs. Wants: Teach them the superhero skill of distinguishing between needs (homework supplies) and wants (that giant ice cream sundae).
  • Spending Leagues: Create envelopes or jars for different spending categories. When the cash runs out, it’s mission accomplished. They’ll feel like true budgeting superheroes.

Sharing Is Their Superpower

  • Super Givers: Encourage them to share a part of their allowance with a cause they care about. They’ll be like Robin Hood but without the tights.
  • Feel-Good Vibes: Show them that giving is like a superpower that makes the world a better place. Who doesn’t want to be a hero?

And there you have it, the ultimate guide to teaching your child to save and budget using their allowance as a tool. Remember, every superhero has to start somewhere, and your little financial avenger is no exception!

For more fantastic tips and tricks on kids’ allowances and financial education, check out our resource.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

Should allowances be tied to chores or responsibilities?

Should allowances be tied to chores or responsibilities is an age-old debate. There are three schools of thoughts.

Allowances Tied to Chores:

  • The Basic Job Contract: Some parents treat allowances like a job contract. You do your chores, you get paid. Simple, right?
  • Teaches Work Ethic: It’s a great way to instill the value of hard work and earning money. Kids learn that money doesn’t grow on trees; it comes from effort.
  • Motivation Factor: When there’s a financial reward involved, kids may be more motivated to complete their tasks. It’s like a little monetary pat on the back.

Allowances Tied to Responsibilities:

  • Part of Being a Family: Some parents argue that chores should be done simply because you’re part of the family, not because you get paid. After all, you don’t get paid for breathing, right?
  • Life Skills: Pitching in with responsibilities teaches kids valuable life skills like cooking, cleaning, and teamwork. It’s like giving them a head start on adulting.
  • No “Chore Negotiation” Drama: When allowances aren’t tied to chores, there’s less room for haggling or complaining. It’s all about pitching in and sharing the load.

The Middle Ground:

  • Hybrid Approach: You can always strike a balance. Give a base allowance for being part of the family and contributing, but offer extra cash for additional chores.
  • Financial Education: Use allowances as a way to teach financial responsibility. Encourage kids to save a portion, share a portion (for charity, for example), and spend a portion.

Ultimately, there’s no one-size-fits-all answer. It depends on your family’s values and what you’re comfortable with. So, don’t be afraid to mix and match or adapt your approach as your kids grow and their needs change.

For more in-depth advice on allowances and parenting, check out How To Give Your Child an Allowance. And for a broader perspective on the topic, explore our other Allowance advice.

Remember, every family is unique, and the best allowance system is the one that works for you and your kids. Happy parenting!

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

The Benefits of Giving Kids an Allowance: Teaching Financial Responsibility from an Early Age

benefits kids allowance
Image Source: Pexels

In this day and age of instant gratification and easy access to credit, it may seem old-fashioned to give kids an allowance. However, educators, counselors, and economists agree that an allowance can be a valuable tool for teaching children about money and financial responsibility. Not only does it provide them with firsthand experience in managing money, but it also helps build a sense of trust and responsibility within the family. If you’re considering giving your kids an allowance, here are some dos and don’ts to keep in mind.

Have a Plan: Setting Clear Expectations

Before you start giving your children an allowance, it’s important to have a plan in place. This means thinking through your stipend strategy and setting clear expectations. Ask yourself why you’re giving them an allowance, how much you’ll give, and how often. Consider whether the allowance is simply a benefit of being a member of the family or if it’s tied to specific responsibilities or achievements. Determine what expenses your kids are expected to cover with their allowance. By having all the details figured out beforehand, you’ll be better prepared to answer any questions your children might have.

“The clearer the deal at the outset, the greater the lesson — and the fewer hassles you’ll have downstream.” – [Reference Article 2]

Money Talks: Communicating the Plan

Once you’ve established your allowance plan, it’s crucial to communicate it effectively to your kids. Take the time to explain the rules, the reasons behind them, and any potential scenarios that might arise. You may even want to write down the plan, sign it together with your children, and display it prominently as a visual reminder. This will ensure that everyone is on the same page regarding the amount, frequency, and purpose of the allowance. Clear communication from the start will lead to smoother implementation and fewer misunderstandings down the line.

“The more often you talk about money with kids, the more knowledge you can equip them with when the time comes for them to manage their finances on their own.” – Investopedia

Teaching Common Cents: Using Allowance as a Learning Tool

One of the main benefits of giving kids an allowance is the opportunity to teach them about the value of money and financial responsibility. Allowing children to manage their own money from an early age can help them develop important skills such as budgeting, saving, and planning for the future. By giving them the freedom to make their own financial decisions, they will learn to be more independent and accountable for their choices. It’s important to let them make mistakes and learn from them, as these experiences will shape their understanding of money management.

“Kids need to handle it themselves, making their own mistakes.” – Great Schools

The Three S’s: Spending, Saving, and Sharing

When implementing an allowance system, it’s beneficial to introduce the concept of the three S’s: spending, saving, and sharing. Teaching kids to allocate their money wisely by spending a portion, saving a portion, and donating a portion fosters a well-rounded understanding of financial management. Encourage your children to think about their financial goals, whether it’s saving for a specific item or contributing to a cause they care about. By instilling these values early on, you are equipping them with lifelong skills that will serve them well in adulthood.

“This is an excellent way to expose them to the three most important things they can do with their money, and it’s a lesson that can last a lifetime.” – Great Schools

Chores and Allowance: To Tie or Not to Tie?

A common debate among parents is whether or not to tie allowance to chores. Some believe that connecting allowance to chores teaches children the value of hard work and responsibility. However, others argue that chores should be seen as a communal effort within the family and that allowance should be a separate entity. Ultimately, the decision is up to you and what works best for your family dynamics. If you choose to tie allowance to chores, be prepared for potential challenges when children don’t complete their assigned tasks. It’s important to strike a balance between teaching responsibility and avoiding a transactional mindset.

“Problems always crop up when — inevitably — kids don’t do the required work around the house.” – Great Schools

Don’t Deny Their Dues: Using Allowance as a Teaching Tool, Not a Punishment

While it may be tempting to withhold allowance as a form of punishment for bad behavior or poor grades, it’s important to resist this urge. The purpose of an allowance is to build trust, improve communication, and foster cooperation within the family. Using allowance as an unexpected disciplinary tool can lead to resentment and a breakdown in trust. Instead, find alternative ways to address behavioral issues while upholding the original agreement. By separating allowance from punishment, you can maintain a positive and constructive approach to teaching financial responsibility.

“No matter how tempting, don’t withhold allowance as punishment for bad behavior or poor grades.” – Great Schools

Show Them the Money: Consistency and Reliability

Consistency is key when giving kids an allowance. Regular and predictable payments help children develop a sense of responsibility and planning for the future. Establish a specific payment schedule and stick to it. Whether it’s weekly, bi-weekly, or monthly, make sure your children can rely on receiving their allowance on time. This consistency builds trust and reduces the temptation to negotiate or haggle. By prioritizing the payment of allowance, you demonstrate the importance of financial commitments and instill a sense of reliability in your children.

“One of the most powerful learning aspects comes from consistency: the regular, expected arrival of funds, on time and every week.” – Great Schools

Starting Early: The Age for Giving an Allowance

The question of when to start giving kids an allowance often arises. While there is no one-size-fits-all answer, many experts agree that children as young as three or four can benefit from a simple and understandable weekly allowance. By the age of five, many children already show an interest in money and understanding how it works. However, the decision ultimately depends on the individual child’s maturity and readiness to handle money responsibly. Pay attention to your child’s curiosity and desire to learn about money, and use your judgment to determine the appropriate age to introduce an allowance.

“By the time they’re 5, many already have started to save.” – Great Schools

Say No to Credit: The Importance of Controlling Spending

In a world of easy access to credit and online transactions, it can be tempting to give kids access to credit or debit cards. However, financial advisors strongly advise against it. It’s important to maintain control over your children’s spending and teach them the value of physical money. By requiring them to come to you for every expense, no matter how small, you instill the idea that spending should be a deliberate and conscious decision. If your children need to make an online purchase, have them reimburse you in cash immediately from their allowance. This way, they learn the importance of responsible spending and avoid developing a reliance on credit.

“You don’t want your young ones getting used to the idea that it’s easy to spend plastic money on the Intertubes.” – Greenlight[Reference Article 3]

The Path to Financial Literacy: A Stepping Stone for Future Success

Once children reach high school or even middle school, an allowance can serve as a stepping stone to more advanced financial concepts. As they grow older, consider opening a bank account with them as the custodian. This introduces them to the world of financial institutions, investing, earning interest, and balancing a checkbook. By having hands-on experience with money management from a young age, children will be better prepared to handle their finances as adults. The lessons learned through an allowance can provide a solid foundation for future financial success.

“Your kids will be far more likely to learn and understand those ideas easily if they’ve been living with the lessons of an allowance all along.” – Greenlight[Reference Article 3]

For more tips about how to handle allowances with your kids, see How To Give Your Child an Allowance and our general Allowance advice.

In conclusion, giving kids an allowance can be a valuable tool for teaching financial responsibility from an early age. By having a plan, communicating effectively, and using the allowance as a learning tool, parents can empower their children to make informed financial decisions. Whether tied to chores or given as a benefit of being part of the family, an allowance provides children with real-life experience in managing money. By emphasizing the three S’s (spending, saving, and sharing) and maintaining consistency and reliability, parents can set their children on a path towards financial literacy and success.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

How much should I give my child for their allowance?

The amount you give your child for their allowance can vary widely depending on your family’s financial situation, your child’s age, and your specific goals for the allowance. There’s no one-size-fits-all answer, but here are some guidelines to help you determine an appropriate amount:

  • Consider Your Family’s Budget: Start by looking at your family’s budget to see how much you can comfortably allocate for an allowance. Your child’s allowance should not cause financial strain.
  • Age-Appropriate Amount: For younger children, a few dollars per week can be sufficient to teach basic money management. As children get older, you can gradually increase the allowance.
  • Covering Basic Expenses: You might choose to give an allowance that covers specific expenses, such as snacks or entertainment. For example, you could provide an allowance of $5 per week for these discretionary items.
  • Tied to Responsibilities: Some parents tie allowances to chores or responsibilities. In this case, the amount could be based on the tasks your child completes. Be consistent with the expectations and payments.
  • Educational Goals: Consider the financial lessons you want your child to learn. If you want them to save for specific goals, like a toy or a game, set the allowance at a level that makes achieving those goals possible.
  • Local Norms: Research what other parents in your area give as allowances to get a sense of local norms and expectations.
  • Allowance Components: You might choose to break the allowance into different components, like saving, spending, and giving. In this case, allocate a portion to each category.
  • Adjust Over Time: Be prepared to adjust the allowance as your child gets older, has more responsibilities, and their financial needs change. Periodically review the allowance amount to ensure it aligns with your child’s age and financial understanding.

For more tips, see How To Give Your Child an Allowance and our general Allowance advice.

Remember that the primary goal of an allowance is to teach financial responsibility, so it’s important to use it as a tool for learning. Encourage your child to save some of their allowance, make choices about spending, and eventually budget for more significant expenses as they grow older. It’s not just about the amount but also about the valuable lessons your child can learn through managing their own money.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

What’s the Best Age to Start an Allowance?

The appropriate age to start giving an allowance to a child can vary depending on your family’s values, your child’s maturity level, and your specific financial circumstances. However, many parents begin giving allowances around the age of 5 to 7. At this age, children are typically old enough to start grasping basic financial concepts and are eager to learn.

Here are some considerations for determining the best age to start giving an allowance:

  • Developmental Readiness: Children around the age of 5 to 7 often have the cognitive ability to understand basic money concepts, such as counting, saving, and spending.
  • Responsibility: Consider whether your child can handle basic responsibilities, such as chores and personal tasks. Some parents tie allowances to chores as a way to teach the connection between work and money.
  • Financial Education: The age at which you start an allowance can be an opportunity to begin educating your child about financial matters, including saving, budgeting, and making choices.
  • Family Values: Your family’s values and beliefs about money can influence the age at which you introduce an allowance. Some families choose to wait until their children are older, while others start earlier.
  • Needs and Goals: Assess your family’s financial situation and goals. If your child has specific financial needs, such as saving for a special purchase, it might be a good time to start an allowance.
  • Communication: Ensure that you can communicate clearly with your child about money and the purpose of the allowance. Discuss your expectations and the rules surrounding the allowance.

For more tips, see How To Give Your Child an Allowance and our general Allowance advice.

Remember that an allowance is not just about giving money; it’s an opportunity to teach financial responsibility and life skills. Regardless of the age you choose to start, it’s important to have open and ongoing discussions about money with your child, so they can learn to manage their finances effectively.

As your child grows and matures, you can adjust the allowance amount and the financial lessons you provide to match their changing needs and responsibilities.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

Investing for Kids (Book Review)

Investing for Kids

This article is about the book “Investing for Kids: How to Save, Invest and Grow Money” by Dylin Redling. If you are interested in the topic, in general, visit teaching kids how to invest

I had been meaning to pick up a copy of Investing for Kids for some time. It first caught my attention due to the incredible number of Amazon reviews. Check it out: over 2100 reviews as of mid-October 2022. More importantly, the reviews are excellent.

I finally took the plunge when I saw the author, Dylin Redling, at a financial conference selling the book. My kids now have an autographed copy, much like The Golden Quest and M is for Money. I hope that will make them want to read it more. I don’t want to give them too many money books. The next one that I want them to read is Grandpa’s Fortune Fables. The good news is that while this book says it’s for ages 8-12, I think it’s a better fit for 10-14.

Let’s get started!

First Impressions of Investing for Kids

Investing for Kids is 120 pages long, which may seem slightly intimidating for an eight-year-old. However, there are a lot of illustrations which helps make it a quick read. The illustrations aren’t fluff; there are graphs, work pages, and infographics. With seven chapters, a kid could reasonably do one chapter each night. More advanced readers could do a couple of chapters daily and finish it in a few days.

The chapters are:

  1. Money 101
  2. Save Your Money
  3. Introduction to Investing
  4. Low Risk/Low Reward
  5. High Risk/High Reward
  6. Diversify Your Investments
  7. Grow Your Money

A section at the end includes a brief glossary, a resource list, and an index.

Here’s a little bit about each chapter and what your child will learn:

Chapter Guide

1. Money 101

Money 101 starts with a history of money and its physical appearance. I always find this boring, so I was happy to see that this was short. The book explains how to earn money, how interest works, and was debt is within the first ten pages. Before the first fifteen pages are over, there’s a concise description of the Federal Deposit Insurance Corporation (FDIC), certificate of deposits (CDs), internet banks, credit unions, and brokerages. It ends with a great story about entrepreneur Debbie Fields and her famous cookies.

My favorite part of this chapter is the section on earning money, which asks two specific questions: “What do you like to do?” and “What are you good at?”

2. Save Your Money

This chapter stresses the importance of budgeting and savings accounts so that they can earn interest. It explains what principal is along with simple and compound interest. I’ve seen compound interest taught a lot, but never simple interest.

The part of budgeting dedicates significant space to charity. There’s a brief introduction to passive income, the Federal Reserve Bank, Warren Buffett, and the Rule of 72. I love a page that will inspire you to go on a field trip to different banks to ask them about the interest rates they have on their products.

Unfortunately, this book makes the classic mistake of crediting Albert Einstein as saying that compound interest is the eighth wonder of the world. He most likely DID NOT say any such thing. That doesn’t make it any less great.

3. Introduction to Investing

This introduction to investing section was interesting because it didn’t go into various types of investing. Instead, it mentioned the value of investing early. It covers risk and reward and Return on Investment (ROI). It teaches kids to think about whether they should be risky or safe investors in a way that makes it about their own risk tolerance.

This chapter also covers liquidity, which is something that I often overlook myself. In Bank of Dad, we learned that kids might understand a lot about liquidity because their parents whisk their birthday money away to a savings bank where they can’t easily access it.

My favorite part of the chapter is the short section on evaluating a company’s main attributes: earnings, growth, competition, consistency, and management. This is a terrific way to evaluate individual stocks.

Another notable part of the chapter got a book the top negative review on Amazon. Three pages are devoted to investing in companies that “Make the World a Better Place.” It’s mostly about investing in a company that does good. As part of this, there’s a concise section, about a page, on ESG investing. The vast majority of this section is about the environmental aspect of companies. The review (unfairly, in my opinion) described this section as “woke ‘virtuals’ and ‘morals.'” Many kids are very concerned about the environment, and they should be. They are looking at eighty years of climate disasters, and reversing the damage that has been done can’t come soon enough for them.

This chapter included a page about the Great Recession of 2008. That’s a complicated historical note. It’s one example of why I think this book is better suited for older kids.

Low Risk/Low Reward

This chapter is where the reader learns about specific types of investments. The lower-risk investments covered in this chapter include treasury bills, certificates of deposits (CDs), highly-rated corporate bonds, and high-yield bonds.

This chapter covers corporate credit ratings, bond yield, and expense ratios. I would typically associate an expense ratio with a mutual fund or exchange-traded funds (ETFs), but it does have a place when investing in bond funds.

High Risk/High Reward

The high risk/high reward chapter starts with investing in the stock market. It includes information about individual stocks, mutual funds, and ETFs. It has concepts of avoiding gambling and lotteries as well as understanding bears, bulls, and black swans.

This chapter also includes information on how to open an investment account with online brokerages such as Vanguard, Fidelity, Charles Schwab, or Robinhood. It walks you through buying your first stock, including placing a market or limit order. There’s a section on dividends. Finally, the ultimate mantra is covered, “Buy low, sell high.”

This chapter includes three other types of high risk/high reward investments: private equity, venture capital, and angel investing. I don’t know many kids who can use these investment options. Not many adults have these in their investment portfolios. There are some fun mentions, such as Pets.com’s failure.

There’s one page that mentions investments in “real estate, art, and collectibles.” I think giving real estate investing only part of one page is a big disservice. It’s worse that it is grouped with art and collectible investing. Imagine grouping owning an apartment building in Manhattan with having a few Beanie Babies.

Diversify Your Investments

Diversifying all the investments mentioned in the previous two chapters is essential. This chapter goes into asset allocation in detail. There’s more about exchange-traded funds, investing in funds with low fees, and dollar cost averaging.

This short chapter (10 pages) also includes a short mention of Financial Independence, Retire Early (FIRE), and the rule of 25. The section is about two-thirds of a page. I would have liked to see this be at least a few pages.

Grow Your Money

This final chapter brings it all together by starting with entrepreneurism. There are a few more pages on FIRE. I’m not sure why there was the short section in the previous chapter when it’s covered more here.

Finally, there’s some coverage on adult topics like having a retirement account. There’s more coverage of 401ks than kid Roth IRAs. There’s a brief mention of taxes, which is fine. Kids probably don’t need to get into long-term capital gain taxes.

Final Thoughts on Investing for Kids

The lack of real estate investing information is disappointing. I think it deserves its own chapter in any general investing book. One way to supplement this omission is by watching Teen Titans Go!’s episode of Finally a Lesson

Despite that minor nit-pick, Investing for Kids is a great book for a tween or teen learning how to invest. I’ve read quite a few books for children, and this is the best one on the singular topic of investing.

For topics other than investing please these kid books about money.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

It’s Only Teenage Moneyland

The other day my 10-year-old said to me, “I can’t wait to work at Mcdonald’s in four years.” You don’t usually hear people excited to work in fast food, but he was generally excited. He had seen a sign that Mcdonald’s is hiring 14-year-olds at $16/hour.

I had to double-check it, and he’s right. Of course, I thought back to my first non-paper route job. I had just turned 16 and I was making $4.65 at a local pizza place. After six months, I got a raise to $4.75. After a year, I got $4.85. My next job, as a pharmacy technician paid a whopping $6.41. That was a great job for a kid in the early 90s.

A kid can make nearly $100 after school and still get homework done. That’s amazing to me. In my area of Rhode Island, I bet a kid could make $20/hr with a little looking. There’s such a shortage of workers. At a minimum, there’s never been a better time to find a job.

What’s even better is that the stock market is now more than 25% off its highs. A kid investing now will likely see his/her money jump by 30% in a few years.

There are only a couple of downsides in these awesome economic times for teenagers. First, inflation is high. That means that they’ll have to pay more at the mall. Well, that is if kids still went to the mall. Second, college seems more competitive than ever. I don’t know how great fast food chef looks on the college application, but it’s probably not as good as the chess club president.

I’m curious if my son will still be excited to work in fast food in four years. Maybe he won’t be interested in working at all. I’m not in any rush to find out though. I’m going to enjoy this time as much as I can.

P.S.

I hope some of you caught the song reference in the title. I know I’m old, but I figured that it’s popular enough to work.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth

How to Teach Kids about Credit

teach kids credit

Teaching kids about credit is crucial to their financial education. An excellent credit score can save you hundreds of thousands of dollars. Good credit will help keep lower interest rates with mortgages, student loans, and car loans.

Typically credit is a lesson best learned when they are teenagers. That’s when they may start to apply for credit cards for themselves. However, before we get to the teens, let’s cover a few credit thoughts for younger kids.

Credit for Tweens

My kids are now eight and ten years old. They’ve had a credit card to build a credit history for several years. They don’t know about it, but each is an authorized user on my Amazon Prime credit card. Sometimes credit card companies need kids to be a minimum age, but I didn’t run into this problem with the Amazon Prime card. I keep the physical cards in a desk drawer. Perhaps I should use them to make sure they are building credit. Maybe I should even look at my kids’ credit reports. There are some horror stories about identity theft of kids’ information. At this point, I’m just trying to get them a headstart. I’m probably the weird parent who is nutty enough to think of this stuff when they are so young.

Secondly, I have recently gotten them FamZoo debit cards. These will get them used to using a card instead of cash. I’ll post a FamZoo review soon, but I want to learn more about how it works. I explained the difference between debit vs. credit cards. The FamZoo debit card seems like a credit card if you are a kid, though. It’s physically the same thing. Perhaps more importantly, I like the FamZoo solution because it automates giving an allowance and kids can start making money mistakes. Too often, kids think that money is “locked” in a bank.

Credit for Teens

Young adults in high school should start using their first credit card. Don’t let their first credit card experience be in college. Teaching kids good money habits are impossible when they are on their own. They’ll be swamped in college, and it will be tough to avoid late payments. You’ll want a couple of years to review credit card bills together and ensure they are paid in full each month to avoid fees.

One way to get kids to move from a debit card to a credit card is by introducing them to rewards cards. When I was a teen, I got interested in credit cards because I could earn points on Sony stuff. If credit cards didn’t offer me generous reward perks, I’d probably just use a debit card.

Credit card companies probably won’t give your kids a very high credit limit – lenders don’t want to take a big risk. That’s what you want – teens shouldn’t be making many purchases. Building credit can be done slowly.

Parents should explain the risks of credit. It’s not just about the late fees but how compound interest works against you. Before you teach kids about credit, they should be taught compound interest. When teaching them the risks, give them examples of how 15% interest grows over time. You might want first to show off how great earning 15% interest would be. We’ve all seen charts showing how 7-8% interest grows over many years. Chances are that seeing 15% grow will get them excited. Then you can pull the rug out from under them and say that they’ll be PAYING all that money for nothing if they don’t pay off their card every month. Maybe they’ll want to become a loan shark.

Final Thoughts

When parents think about financial literacy, they rarely think about teaching kids credit. Instead, they focus on saving money. Saving money is very important, but there’s a lot more for kids to learn to round out their financial education. Take some time to give your kids an understanding of how credit works.

Brian MacFarland has reached more than 10 million people on his personal finance journey to financial independence.  He’s been featured in the Washington Post, U.S. News and World Report, and Lifehacker.

Read more on the About page.

If you enjoyed this article please Support Kid Wealth