My daughter turned 7 last weekend, and while she's still happily working her way through the Easy-Bake Oven, craft kits, and American Girl accessories, I'm already planning for her next birthday. Her big gift? A credit card.
Well, sort of. Most credit card issuers won't issue a card to a child under 13 (and only with an adult cosigner, of course). So it will have to be a prepaid card in my name for now (both Visa and Mastercard offer a number of options; some even come with ATM access and other features for a small fee). But that's fine. The idea is for her to start learning how to manage credit in a safe environment, long before she's out on her own.
It's part of a multi-year plan to teach her how to manage money responsibly AND realistically. See, by the time she heads to college in 2023, I doubt paper checks will even exist. And once making purchases by cell phone or fingerprint is widespread, cash likely won't be too common, either. So we're going to skip the passbook savings accounts of my childhood and start next month with an online account at ING, where her allowance will be direct-deposited twice a month, just like a paycheck would. I'll show her how to log on and monitor her balance, and she'll have complete freedom on how to spend it.
Why not, as a coworker suggested, focus purely on saving, encouraging her by matching any amount she saves, as my coworker's parents did? Or buy one of those save/spend/donate piggy banks and require her to put a portion of her allowance in each compartment as many of my friends have done?
Sure, those are great way to get kids to save. But I want my daughter to learn how to spend. Saving is easy (especially when mom and dad make it a condition of your allowance!); what's hard is creating a budget, making tough choices, and living within your means. Those were tough lessons for me to learn as an adult, and I got into debt as a result -- several times. It took a few bailouts from my mom, a couple of cash-out refinancings, and more years than I care to admit for those lessons to fully sink in.
On a high wire ... with a net
What's next? Well, along with her credit card, I'm planning to set her up with an account at Mint.com, which she's familiar with already from watching how I budget our family's income. That way she can monitor her accounts, watch where her money goes (I'm guessing Kindle books, iTunes movies, and art supplies from Michaels will be the top three) and, I hope, enjoy seeing any cash she chooses to save grow. When she's ready, I'd like to get her to start investing a little (ING has a great offering there, too), buying a few shares of companies whose products she loves, like Amazon, Apple, and Disney.
Once she's comfortable with the basics of budgeting and saving, I'll up the ante each year, giving her a progressively larger allowance. But she'll also be responsible for more of her expenses, such as paying for lunch at school, purchasing birthday gifts for friends, and buying her own clothes. Giving her more control will allow her to make more choices -- does she want to shell out $2.50 a day for lunch or save that money and brown-bag it instead?
When she's 13, if all goes well, we'll switch to a real credit card (albeit with a low limit) so she can add responsible use of debt to her repertoire. And if she fails and blows all her cash on designer jeans and a bedazzled cell phone, racking up debt and leaving her hungry come lunchtime? I kind of hope she does --because that's exactly the point. I want her to learn the hard way while the stakes are still low, rather than later in life when rent money or her credit rating is on the line.
My daughter doesn't know about my plan yet -- I'm waiting to get the account set up so she'll actually be able to see it when we talk. But I can't wait to tell her. It's no Easy-Bake Oven, but my guess is that this gift will be the best she ever gets.
Robyn Gearey works on new product offerings for The Motley Fool. She has two children, ages 7 and 4, who only recently grasped that $1 is worth more than two shiny quarters. So this should be fun. She does not own shares in any company mentioned. Walt Disney is a Motley Fool Inside Value recommendation. Apple, Amazon.com, and Walt Disney are Motley Fool Stock Advisor choices. The Fool owns shares of and has written puts on Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.