Keeping a bank account balance well north of zero is a healthy financial habit.
Why? Margin for money errors.
With a generous balance in place, you can:
- Prevent predatory overdraft fees or embarrassing declines. Sometimes an expense is more than expected. No worries. The extra balance will cover it.
- Avoid money anxiety. Life is full of little financial emergencies. An extra balance acts like a mini emergency fund. One less thing to worry about.
- Automate billing with confidence. Putting bills on auto-pilot saves time and avoids late fees. But, what if a bill hits sooner or harder than expected? No need to sweat the precise timing or amount when you have plenty of cushion in your balance.
The bottom line: a bigger balance is better.
Unfortunately, our data shows this habit does not come easily to kids. The last time I dug up our decline data, “insufficient balance” was far and away the most common decline reason at 62%. (That’s almost three times more common than the second most popular reason, “invalid billing address.”)
So how can you nudge your kids into maintaining healthier balances?
Here are three effective techniques — the carrot, the stick, and the handshake:
- Reward kids with parent-paid interest. As any economist will tell you, incentives matter. Pay kids a meaningful bounty for a growing balance, and they’ll keep more on their cards to reap the rewards. They’ll also experience the magical power of compound interest in a memorable way. See how to set up parent-paid compound interest here. (I recommend paying weekly.)
- Assess a parental overdraft fee. That same economist will tell you that loss aversion is a powerful deterrent. If you want to harness its power, fine your kid with fake overdraft fees as described here. A few pokes of the parental overdraft stick will drive that balance up to a safer level.
- Negotiate a reimbursement arrangement. Make your child pay for everyday items, but agree to reimburse the (appropriate) expenses after the fact. That way, your child needs to maintain a healthy balance just to buy the items in the first place, even though you’re still footing the bill in the end. See how to use reimbursements here.
Bribe, badger, barter. Do whatever it takes to build a big balance habit. Your kids will thank you later.
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