Where Did the Cash Go? Understanding Virtual Money

No matter how you track it money is a number. The only way your child knows how much is in his piggy bank is to physically count it. Changes in the cash can only be determined by physically re-counting the money to get an updated number.

Yet, we continue to give our kids cash, even though in the adult world, the trend is away from cash. As parents we may be reassured by knowing that cash is self-limiting. Your child cannot spend $15 if he only has a $10 bill. But today’s kids are growing up in a society that is using less and less cash. Kids are already using virtual money in the form of gift cards and will most certainly be using virtual money as adults.

This trend away from cash is growing and the main reason is the introduction of debit cards in the early ‘90s. Consider the following statistics. According to the Cleveland Fed, the following non-cash transactions grew between 2000-2003, with percentage growth shown in brackets:

* Credit card transactions (6.7%)

* Automated Clearing House transactions (13.4%)

* Electronic benefit transfers (15.4%)

* Debit card transactions (20%)

This trend has accelerated in the years following this report. Look at your own accounts to see how virtual money transactions continue to increase in your accounts.

What does all this mean for money management? The first step is to know how much money (resources) one has. Because virtual money never exists in physical form it can be more challenging to manage, like herding invisible cats. To keep track of money that only exists as a number you have to have a system and mindset for knowing how much money you have in your account.

Because virtual money is not self-limiting like cash you can easily spend more than you intend. In terms of spending, a debit card is simply a plastic version of cash. You swipe it at the register and a number is immediately subtracted from your account balance. Credit card spending can activate small loans when the balance is not paid of each month. At no time is there any cash in your pocket or in your hands.

Automated transfers of money in and out of our accounts eliminate the need for us to have to take action to pay the bill or deposit a check. Now we have to be responsible for being sure there are enough funds in the account when the withdrawals happen. This means that we have to manage the timing of when we electronically spend from our account.

The bottom line in teaching our kids about money is to realize that learning to spend cash is a skill diminishing in importance. The reality is that managing our finances becomes more complex as new types of transactions are adapted. As we add new ways to spend money, we never entirely replace previous methods. This creates the broader knowledge base and extends the learning curve for our children.

Lest we doubt if children can understand complexity, spend a few minutes watching them play a video game. They thrive on learning how to manipulate the rules in virtual settings. They can program the VCR and understand smart phones, iPods and electronic devices of all sorts.  Sometimes they are quicker at solving the complexities than adults are. When it comes to money management parents would be wise to take advantage of this and help their children learn how money works in its many forms.

So what would happen if you skipped the cash and went directly to a virtual money system for your child? Next time we’ll look at what a no-cash allowance is and how it benefits both parents and children.

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