Why you should care

Because we live in a financially illiterate culture. 

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The world is becoming plastic. Many businesses only accept cards now, not cash, a trend so ubiquitous that cities including Philadelphia, New York, Chicago and Washington, D.C., have all recently considered or passed bans on and fines for going cashless. Apps like Venmo and Zelle are often the most convenient way to reimburse friends or buy concert tickets and tablet games. And that’s true not just for adults. The American teens who make up Generation Z, more than one-fifth of the U.S. population, are already four times less likely to use cash than the general public, according to data from debit card company Current. Overall, about 30 percent of Americans do not make purchases with cash in a typical week, according to the Pew Research Center.

At this rate, the next generation will struggle to learn the value of cash if everyone’s turning to plastic, which is why some companies are coming up with ways to help teenagers get experience with plastic before their lifelong credit score is on the line. A new mobile banking startup called Step is looking to serve the pre-banked market — those 75 million children and young adults under the age of 21 who may have not have access to a debit card. “We want to be that first bank account … that first spending card” that helps young people learn “the balance between spending and savings,” says Step CEO C.J. MacDonald. And it even comes with parental controls.

There are other mobile offerings with pre-21 options by everyone from big banks like Wells Fargo to startups like Chime, Monzo and Simple, to name just a few. But Step is aimed primarily at teens (13 and older) and doesn’t charge for ATM access, checks, minimum balances or overdrafts, like others do. “The average consumer pays $329 per year in banking fees,” MacDonald notes. Younger consumers are likely to be operating with limited funds, so even small fees quickly eat up their reserves, which is “predatory,” he says.

Kids don’t see much cash in hand anymore — even Mom and Dad are often just waving a phone over a machine.

Opening a Step “spending” card, which combines elements of debit and credit, requires the permission of at least one adult. Parents (or a supervising adult) can set limits on spending by category — maybe your middle schooler is permitted to spend $40 a month on food, but only $20 to go to the movies. The card is linked to an app that allows both users to reload or send money and can be used to shop online or through Apple Pay. Kids don’t see much cash in hand anymore — even mom and dad are often just waving a phone over a machine. A spending card helps teach teens how to manage money digitally — like they’ll have to do when they’re young adults, MacDonald says.

However, there may be some valuable skills lost when cash gets nixed, says Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report, even if she agrees that the general idea of teaching kids financial literacy is a good thing. “The problem with credit cards is that it gives the consumer a feeling that they aren’t spending money. You lose the psychological connection with your finances. So, handling actual money while you’re young helps develop that connection,” she says.

The Step card is in its early stages, with plans to launch this spring — there’s a waiting list of interested applicants — so time will tell if some clever cardholders find ways to game the category-spending system.

Meanwhile, perhaps the happy medium is for parents to give their kids cash for their allowance, and have them deposit to a spending card account like Step. “This is an opportunity to introduce them to mobile banking and the importance of a savings account,” Harzog says.

3 Tips for Teaching Teens Personal Finance

  • Start an early age: Bad habits die hard. And if you are set up for failure, you typically achieve it. “You don’t know what you don’t know,” MacDonald says. But good habits are hard to kick too. Talk to kids early on about making and saving money.

  • Talk about “good” debt: Debt is rarely good, despite what credit score proselytizers would tell you. Young adults all believe “that their credit score is paramount,” says Lizbeth Pratt, founder and CEO of Givling, a crowdfunding platform that pays off student loans.

    Sure, debt that helps you get an education or purchase a home that will increase in value can be good — it paves the way for future financial success. But blindly using cards to build up a credit score or accrue airline miles or other perks can be dangerous, and rarely pays off in the long run.

  • Preach compound interest: If a young person invested $2,000 annually in a stock market tracking fund from 18 to 25 and never invested another cent, they would be a millionaire at 65 (according to the average long-term gains of around 10 percent annually). It’s why Albert Einstein called compound interest the “eighth wonder of the world.”

    Consider teaching your child compound interest: Tell them that if they save their money instead of spending it, you will add “x” percent to their account each month … and be proud when they decide they would rather save and see that account grow.

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