As 'Invisible money' is becoming more prominent in the digital age, teaching your children about money and how to manage it is now more important than ever.

The 2016 UK Money Advice Service report reveals that financial habits are usually formed by the age of seven. Other recent research illustrates that the increased use of internet banking, online shopping and the widespread adoption of credit cards in everyday life is creating an area of misunderstanding for children who are beginning to learn about money management. These findings suggest that there is an obvious need for parents to educate their children about money and saving so that they develop responsible long-term financial habits.

In today’s society very few transactions are made with actual paper money. Instead, many are opting for card or online based payment methods. Not seeing money exchanged for purchases makes it harder for kids to get their heads around what things cost and how money works. They might see this ‘invisible money’ as an abstract and unlimited resource rather than real money coming in and out of their own bank account.

In 2014, the US Parents, Kids and Money Survey suggested 73% of parents agree that because transactions are often digital, kids think of currency differently than they did when they were growing up. More locally, data has emerged suggesting that 33% of parents believe digital transactions make it harder for their child to understand the value of money and roughly one in three (35%) children simply don’t know how digital purchases are paid for. These types of statistics are alarming and highlight the influence digital technologies are having on how children understand money.

Mobile phones, tablets and laptops are all making it easier for your children to spend money online. For instance, many apps are now ‘freemium’ – meaning that whilst the app was initially free to download, the app will proceed to ask users to purchase special features, powers, or content for a fee. If making app purchases is not prevented by a password prompt, then a couple of accidental taps in a game could cause your children to unknowingly make real-money purchases.

With 61% of kids buying apps or making in-app purchases every month, it's important for parents to establish some ground rules with their own kids to ensure the child is conscious and aware of the money he or she may spend and its ramifications. One useful tip is to ask for the money from your child as soon as they make the purchase to establish a good understanding that it is still real money. Another great tool can be to educate your child during the transaction process, discuss how you are paying for the goods and/or service during every day transactions and how you have arrived at this point in relation to the entire purchase path.

In an age where we can slot a plastic card into a ‘hole in the wall’ and obtain physical currency, or where you can ‘tap and go’ to pay, it is easy to see how our children might not fully understand where the money used to pay for things comes from. The best remedy to this issue is to frequently explain to your kids the purchase path or the entire purchase process; from earning the money, to depositing the money into the bank and ultimately the final purchase and receipt. Using cash rather than electronic funds can also help to provide your child with a visual representation of how currency works. Once they understand physical money slowly introduce them to the idea of credit and credit purchases.

While parents have been using pocket money and chores to teach children about budgeting for decades it remains an invaluable tool. Giving your children pocket money in return for small chores can help children understand the connection between time spent doing work and money. A weekly pocket money allowance can also help to develop your kids’ budgeting skills. If you give them a weekly sum of money which they need to use for daily routine activities along with some personal luxury money, it can teach them to prioritise between needs and wants.

Children can be left unexposed to money and transactions for years only to misconstrue their perceptions about how money works and how to manage it responsibly. While they may not see you using cash for every purchase, remember that frequent conversations about how money works are the best way to help your children have a good foundation for understanding personal finance. Talk to your kids about money often to help them make this invisible money real.

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The information in this article is of a general nature and does not constitute as advice in relation to any investment or purchase. It has been produced without taking into consideration your personal financial circumstances, objectives or needs. Prior to making any decision you should conduct your own investigation and analysis of any benefits or costs associated with such. You should seek your own independent legal and financial advice. You should also read our Terms and Conditions for Savings Accounts and Payment Services and our Financial Services Guide available on our website, before applying for any of our financial products and services. Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557, AFSL/Australian Credit Licence 238305.

Published May 2016