Teaching kids about coins is relatively easy. Two nickels make a dime. Four quarters make a dollar. Teaching them about currency isn't much harder. If something costs $5, you can pay with a five dollar bill or five singles. But once kids graduate to plastic, the terrain gets rougher-for the kids and for us parents.
As regular readers know, I am a longtime critic of credit card companies that zero in on tweens and teens as a lucrative market. The statistics about kids and credit are scary.
Thus, it was with trepidation that I approached a plan proposed by my husband, Michael, and our oldest daughter, Allison, 14, to open a checking account that would be accessed by a debit card.
Like checks, debit cards can be used only if there is money in the account.
This is far better than credit cards, which are mini-loans that rack up phenomenal fees and sky-high interest rates if you don't pay them in full at the end of each month.
Allison was ready to have more control over her money but I was loath to give it to her. I agreed only after getting a firm commitment that she still would abide by the rules of allowance in our household: A contract is signed each month outlining how she will divide the cash among the four money choices (spend, save, donate and invest), what purchases she will be responsible for and presentation of the receipts for those purchases at the end of the month.
An online search revealed that many credit unions and community banks offer free teen checking accounts. Michael chose to open Allison's account, complete with a MasterCard-branded debit card, at USAA Federal Savings Bank because its debit card can be used at any ATM without incurring a fee.
There are some good and bad things to report, but overall this was the right move at the right time for Allison. She was ready to handle the responsibility and we found some surprising results. Chief among them: She actually spent less than she would have if she had been using cash.
I think this experience was so successful because we entered it only after two years of paying allowance in cash and stressed that we would enforce the same rules on the checking account that we did with her cash allowance, along with two more, specific to her debit card:
Pay yourself first. This is in keeping with my goal of getting kids to think about savings first. We required Allison to immediately transfer some money into savings, just as she would have deposited cash into her savings account if she were still getting her allowance that way.
Set aside money for donating each month.
Keep an eye on that savings balance. Once it grows large enough, consider making an investment.
Be fastidious about recording every withdrawal and deposit. This rule is the key to debit success. We told Allison she would need to record every withdrawal and deposit in her checking register so she always knew what her available balance was on her card.
Agree to a weekly meeting with her dad and me to go over the check register.
Allison listened intently to the rules, then asked me to take her to the ATM. She wanted to put some money in savings (good so far), take out some money for her church donations (even better) and then go to the mall. Ugh.
But it was not as bad as I had expected. First, she was upset to learn that the ATM wouldn't let her take out just $5. The minimum withdrawal was $20. It was more money than she felt she could trust herself with at the mall.
She did end up spending the $20, confirming for her that money in hand would be a major temptation. But she did not whip out the debit card because she was not quite sure how much was left in the account, so she spent less. Allison says that if she had her entire allowance in her wallet, she would have been tempted to spend it all, just as she spent all of the $20 she took from the ATM. How's that for a new twist on behavioral economics?
I still am not crazy about this move to a debit card. With a checking account, the transfer of money is less concrete than with cash. But I have learned that money rules still can be in play as long as I am willing to enforce and manage them.
Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, www.MoneySavvy Generation.com. E-mail her at Susan@MSGen.com.