Is the Virtual World Contributing to Financial Illiteracy?

There is no doubt the internet has changed the way we shop and make purchases. Not only has it made things more convenient, letting us make purchases from the comfort of our own home, but also internet shopping has removed the need for cash. Even when we do venture out of the home and go shopping, many people forgo physical money altogether, preferring instead the convenience of paying for everything with plastic. However, if you have children, this may not really be a good thing.

The problem with this cash-free society is that it makes teaching children about the value of money incredibly difficult, because children have nothing tangible to learn with. Even when we withdraw cash from a bank machine, the concept of where this money comes from can be quite difficult for a child to grasp. After all, you have simply inserted a plastic card into the wall and received cash.

Then there is the rise of adults opening up bank accounts for their children. While on one hand this is a good idea, as it helps children learn about saving and earning interest, it can also remove the tangible nature of money because looking at numbers on a bank statement is far removed from counting out coins from a piggybank.

Plastic culture

Of course, children need to learn about using plastic. Both credit and debit cards are essential tools they will have to get to grips with by the time they are adults, and by the time today’s children grow up and become financially independent, credit and debit cards are probably going to be even more important, especially if cash use continues to decline. However, without a basic understanding of money, where it comes from, the difference between debit and credit, and knowing that money spent equates to money earned, we could be at risk of bringing up a generation into this virtually cash free world who are financially illiterate.

Already, many children are growing up with a limited grasp of how debit and credit cards link to physical money. Many parents now make purchases for their children on the internet, buying books, video games and other items. Some parents are even giving children their very own credit card to make purchases or to act as a safety net in case they need money when they are out. In addition, other parents are readily offer up their credit card details to their children so they can purchases on the internet themselves or even open up credit accounts, both of which can have unforeseen consequences.

The blurring of real and online worlds

A good example is the number of parents who open up accounts for their children to play online video games. As most parents know, online gaming is incredibly popular among children, but many games not only require a monthly subscription to play, but also in many cases, allow players to purchase additional items in the games using real money. Of course, parents have to hand over their credit card or debit card details to open the accounts for their children, which is where the danger lies.

An increasing number of news stories have highlighted incidents of children running up huge credit card bills by making purchases while playing online games. Many of these children are very young, so can’t possibly grasp the concept that buying things in a virtual game world has an impact in the real world. In addition, the number of children that run up bills by making online purchases without their parent’s knowledge is rising too.

All this shouldn’t come as a surprise, because but with so many of us now making online purchases, the line between the real world where money is physical and has to be earned, and the virtual world, has become blurred. It is, therefore, no wonder that children have a hard time grasping the basics of financial management and how credit cards should be used responsibly, which could be costly when they grow up.

Young debtors

There has been a significant rise in young adults, and in particular, students, getting into deep financial trouble because of improper credit card use. In the United States, one fifth of all bankruptcies are filed by college students, and the picture is no better in the UK. Most students have little or no credit history, and yet many are offered credit cards as soon as they start university. The consequence of this is that many students are getting into difficulty. Even by university age, not enough students have an understanding of interest rates and charges, but one of the biggest dangers is the ease in which credit cards give ready access to cash. Credit card cash advances are controversial, because they can encourage irresponsible behaviour. Making purchases with a credit card is one thing, but withdrawing cash that may be spent on anything, including socialising, leads many students to become debt ridden before they’ve even started work.

Another problem is that many students are leaving school without a strong psychological link between actual cash – the physical money they earn – and the money they see in their bank account and credit cards statements, which is probably because of the reliance of plastic for online shopping and the diminishing use of cash, as mentioned earlier.

Back to basics

This psychological link is an important one too. Because even if a young person understands that the money borrowed on a credit card has to be paid back, psychologically and subconsciously this link can remain fuzzy. Growing up in a world where money is not tangible, but virtual, means the psychological link between what you have and what you have earned with what you can spend can be difficult to develop, but as with most things, by teaching children about money and the value of things at a young age, can help reinforce this psychological link.

Most children get money quite early on in life, whether as a Christmas or birthday gift or as pocket money, and often this is where developing this psychological link should start. For instance, paying money directly into a child’s bank account may seem like a good idea for encouraging the child to save, but actually handing them the physical cash helps enforce the idea that money is a tangible thing that exists beyond the numbers on a bank statement or online account.

Secondly, many parents make online purchases for their child and either deduct the money from their child’s pocket money, transfer it out of their bank account or even not take it from them at all. By far a better tactic is to make your children physically hand over the cash before you make any payments online, which again, will reinforce that what is spend on the plastic has to come from somewhere. The same is true in making purchases in physical shops. The act of handing over physical money and receiving change shouldn’t be underestimated, and neither should the importance of the trust old piggy bank, as it can provide a child with something that is physical, tangible and visible, rather than virtual.