A potential financial crisis is coming for our children, a predicament that can negatively affect our entire economy. It’s all about money. Why are we teaching our kids to use cash when most adults embrace digital methods for money transactions?

Transactions using digital money, or invisible money, are recorded as numbers. The running calculations in an account result in a single number, the balance. Many transactions never exist as cash. Therefore, one can say that money, in much of our daily commerce, is a simply a number.

There is nothing wrong with cash. The problem is that kids are not learning to manage money as a number. Seeing a number increase and decrease in an account over time is an essential lesson in money management. 

Cashless transactions increasing

Over the last fifty years, personal finances migrated from primarily cash and checks to many forms of cashless transactions. Cashless purchases are now common at vending machines, parking meters, and mobile payment devices. In fact, many people use debit cards that mimic cash spending. Others just use their smart phones.

If today’s kids do not learn how to manage digital money effectively they will see their financial resources as adults constricted. Cashless transactions come with a price when the associated rules are not followed. 

Overdrafts, late fees, and credit card interest waste precious financial resources. All of these negatively affect a credit rating resulting in higher interest rates for borrowing because of lower credit scores. 

This all reduces young adults’ buying power, limits their resources to save money for short-term needs, and constrains their ability to invest, start businesses, or contribute to retirement accounts. 

The potential result will put a drag on young entrepreneurial efforts to grow the nation’s economy. As a result, parents may find themselves using retirement funds to help their adult children for business or personal needs. Consequently, parents with reduced retirement money will place additional burdens on government. 

Cash vs cashless conumdrum

We create this dilemma because we continue to give our kids cash allowances while also letting them spend using cashless methods. So how can parents address the cash vs. cashless conundrum when it comes to teaching kids how to manage money? 

Let’s start with recognizing that money management is a skill similar to others our kids learn. Watching a baseball game does not make one a skilled baseball player. Likewise, knowing how to read music does not make a capable pianist. And seeing how to ride a bicycle doesn’t teach a kid to not fall over. 

When a young kid asks to learn a new skill parents provide lessons, equipment, encourage practice, and celebrate success. Developing a skill requires repetition, mistakes, more repetition, and more mistakes, all leading to eventual successes. 

Learning a new skill

Money management is also a skill that can be learned. However, there are some key differences when it comes to money.

First of all, parents with all good intentions do not want their kids to make mistakes. Consequently, parents direct allowance spending, thereby making decisions for the child. This is similar to parents playing the piano keys, or catching the outfield fly. The kid is not engaged in the process. 

The solution to the money control problem is for parents to give their children complete autonomy over whatever funds are in their control. Parents let go of the bicycle knowing there will be bumps ahead. So it is with money. Kids will not gain experience if parents maintain control.

According to the T. Rowe Price 2017 Parents, Kids & Money Survey, kids who manage their own money have better money habits. 

Making money decisions

Secondly, money management is all about making decisions. Wisdom is only gained by learning from mistakes. A $10 mistake by a kid is a gentle lesson compared to a maxed out credit card as a young adult. 

Perhaps the most challenging part of teaching kids about money is the ever-changing money landscape. We cannot ignore the reality that physical cash is diminishing in importance, while digital transactions are the driving force in our financial system.

Whether money is physical or a number in an account, all money can be represented as a number. Today’s parents need a new approach to the allowance system, one that treats money as a number. 

Start now to avoid the money crisis

As a mom, I taught my kids about money using a cashless system and wrote a book about the process, The No-Cash Allowance. Parents can provide allowance but do it without cash through a written account kept in the home. Kids keep accurate records of money in and out, have the autonomy to make their own decisions and mistakes, and have age-appropriate spending responsibilities. 

This creates a consistent, repeatable process that grows with a child from pre-school through high school graduation. The child manages money as a number in a day-to-day scenario similar to that of an adult. Such hands-on experience with money teaches kids confidence, decision-making, and responsibility.

Now, more than ever, I fear that if parents don’t change their approach to allowances, their children will pay the price as adults.