Key takeaways

• Start young kids off with real money before introducing them to the digital world of money.
• Make sure kids know that using digital money is not a game and will have real consequences.
• Introduce teens to safe digital spending using financial tools, such as debit cards.

Today, digital money is business as usual, as more people use their smart devices to conduct their financial transactions. So how do you teach children about money in this digital age?

Medium of exchange

Language is one of the early experiences a child will have with abstract, symbolic concepts. And if a child can work that one out, they can work out that silver coins and green pieces of paper can be exchanged for things they really want. The question is: When do they understand this?

If you ask your children what Mommy or Daddy do with money, and they can answer "buy things with it," then they've grasped the basic concept of using money as a medium of exchange.

Because this young generation has grown up in the digital world, they're incredibly comfortable with the virtual universe. They probably were introduced to this world via video gaming. And many video games, even educational ones, reward players with virtual money that they can use to buy in-game rewards, like pets, clothes, furniture, and more. So subtly, kids are being introduced to the concept of medium of exchange, and the power of earning and spending already.

But playing these video games and "earning" fake money can cause confusion between digital gameplay and the real world of money—which can lead to unwanted problems in adulthood.

Here are 5 tips to help you introduce your kids to digital money:

1. Make money real for young kids

It's the tangibility of money that makes it such a useful tool in teaching children how the world is structured. To make lessons real, start with actual hard currency before introducing your kids to the digital kind. Coins and bills are tangible and visible. Kids still see them every day, and they quickly grasp the general concept.

Incorporate counting and coin-sorting activities into your gameplay. Get some items out of your pantry and put "price tags" on each, then give your kids a pile of change. Have them count out the right amount to buy every item. As they grasp this concept, you can start to teach them how to make change, an important life skill.

2. You can bank on it

Take kids into a physical bank and allow them to deposit some of their real gift money or, even better, hard-earned allowance, into a joint savings account with you. Then go home and show them how their bills and coins became digital money in their online account. Explain that banks hold both hard currency and virtual money.

3. Check it out

After your kids have mastered a savings account, set up a joint checking account and allow them to use some of their spending money. Show kids how to write a check, just so they understand how it works. Although this is a disappearing life skill—even the US Department of the Treasury¹ sends most of its Social Security checks out electronically—it's still important to know.

When they're elementary school age, kids should be ready to understand electronic spending. If they receive an allowance, show your kids how you're paying them by putting money into their online account. When they want to spend physical money, a trip to the ATM to get cash will reinforce how real money can become digital money and vice versa.

It's also a great time to discuss what ATM fees might be involved. Explain that the bank is providing a service that must be paid for; the ATM needs to be serviced by real people, who load the machine with bills. Some banks or financial institutions may not charge or may reimburse fees, but in general it's good to prepare kids to pay attention to fees. Also, explain that ATM cardholders get a secret personal identification number (PIN)—that should never be shared with anyone—that allows them to deposit and withdraw money.

4. Start with debit cards

Teens innately understand digital money. But they may need help understanding that money, digital or not, is a finite resource. Debit cards do just that.

Explain that a debit card may look like a credit card, but the bank makes you have money in your account in order to use it as a convenient way to buy things. When you run out of money, the debit card doesn't work. Teens also have many payment and money movement options available to them, but begin with a debit card, and then you can expand the lessons to include other monetary tools.

5. Build smart online consumers

Older teens understand the world of online advertising and know that social media gives them important information to make them savvy consumers. Teens can research their choices, shop sales, read reviews, compare products, and hopefully hold off on impulse shopping.

Taking a 2-week time-out to really research an expensive purchase can help to distinguish a want from a WANT for a teen. See if your teen will agree to "press pause" for 2 weeks to think about why they want to buy something and if they're committed to using their own money. If your teen is earning their own money, their spending decisions will be even more valuable to them.

We live in an exciting new electronic world, but it's our job as parents and grandparents to prepare our next generation for how this new world influences them. It's also important to teach kids and teens to protect themselves from hackers and lurkers. Their private information can be stolen and they need to learn ways to protect it.

To learn more, watch a Viewpoints webcast on Fidelity.com: Raising money-smart kids

When it comes to money and children, it's not important what form it is, how it's created, or how it moves. When it comes to money, it's all about teaching your values and life skills to your kids … nothing more, nothing less.