Avoid This Financial Mistake When Teaching Kids About Spending Money

avoid this financial mistake

If most parents are concerned about setting a good example and feel they are doing a good job at it, then what financial mistake could you be overlooking?

“About 70% of parents responded that they are very concerned or extremely concerned about setting a good financial example for their kids.”

“Over 80% feel that they are doing a good job at it.”

T. Rowe Price. “7th Annual Parents, Kids, & Money Survey. Mar 2015.

Today, it’s rare to see people using cash when shopping, eating out and paying for most things. Don’t make the financial mistake of always using plastic (or your phone) to pay for everything. This sets a bad example, especially for younger kids who haven’t learned to use cash and coins.

They could end up believing that credit and debit cards are like a magic wand. You swipe and things are magically paid in full. Kids may not understand the value of money if they don’t see it being handed over in exchange for goods and services.

The Financial Mistake is a Big Disconnect

This disconnect between money leaving your account when you swipe feeds the strong impulse of instant gratification. Money is less tangible when you use plastic. You may lose track of how much you have spent until you see the bank statement or credit card bill. 

When using cash, you experience your hard-earned money disappearing from your wallet as you spend it. You might have sacrificed by working extra jobs or cutting spending in another area to make that purchase. You lose shat experience when you swipe. Paying for a ten dollar item looks no different than paying for a thousand dollar item to a young kid when you swipe your card at the register.

Kids Start With Cash

Once kids have learned that you have to work to earn money they can receive cash. If they have saved to buy something and they physically hand over the cash, then they better understand the value of the money and the work that earned it. Can you see how that lesson resonates much better with cash than with plastic?

If they don’t learn this lesson, then your kids are more at risk of being unable to control their spending. Not understanding the value of money and work leads to poor budgeting skills and a much higher probability of falling into debt as a young adult. If kids are used to just swiping their card whenever they need anything, then they can easily overspend and suffer the pain and stress of crushing debt.

Don’t Forget About Services and Subscriptions

According to the same T. Rowe Price survey from earlier above, 70% of kids use cash when buying things such as food, clothes, and entertainment. That’s good news but parents need to watch out for the things they don’t pay with with cash. Think about subscription payments tied to a credit card such as Netflix, music streaming and video game downloads. Make sure that kids understand where the payment for these items is coming from too.

Mobile phone service provides a good opportunity to teach this point. My wife and I had our girls pay us a small portion of their chore money to understand the value of that service. They knew that each paying $5 a month was only a small part of the family phone plan with calling, texting, and data service.

Once your kid has mastered using cash and operating with a monthly budget, it’s a good idea to get them a separate checking account tied to a debit card. Because they learned the lessons about the value of money and work, they will be less likely to get into debt trouble that comes from the financial mistake of swiping without understanding the consequences to their savings.


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Author: Daddy401k

The Dad of Daddy401k is John Q. Miller. John is a Ramsey Solutions Master Financial Coach and earned a Certificate in Financial Planning from Florida State University. Daddy401k is what his daughters called the financial literacy for kids program he and his wife created to teach them how to manage money, avoid debt, and start investing early for their financial freedom. John’s and his wife’s personal finance coaching of their daughters resulted in two young women who are college graduates, employed, debt free, living on a budget with an emergency fund, and already investing in their retirements.

4 thoughts on “Avoid This Financial Mistake When Teaching Kids About Spending Money”

  1. Great advice! I usually no longer actively carry much cash for many reasons and life experiences, theft being one of them. Each of our children has a “money envelope” that they keep in our home safe. When they want to use their money for something, we discuss, then we open the safe for them, get their envelope, they take out their cash, and they update their new balance on the front of the envelope.

    1. The envelope system is how we started out too, Joe. Once the kids got older, they started teen checking accounts which came with a debit card. Because they learned about spending with cash, they didn’t see the card as “magic” – they understood the swiping took money out of their account. 💵

  2. Thanks John for the article. I believe another benefit in encouraging children at a young age to use cash is an improvement in their mathematics skills when they begin budgeting and checking change.
    Using cards for payment also reinforces the “out of site, out of mind” mentality which contributes to poor self-discipline.

  3. Good point. I’ve definitely unconsciously steered away from using cash. My 12 year old asked me for cash the other day and I was like ??
    So I got him a prepaid card I can refill but now after reading this I’m not sure I’ll continue to use it…thanks for shedding light on this topic!

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