My husband wants to get our 16-year-old daughter a prepaid card on which we will load a set amount of money each week. She's really bad with budgeting (and really good at spending), so he thinks this will be a way for us to say, “OK, this is how much you get this week, if you run out, too bad.” I'm concerned about teaching her that using plastic is a good thing, because I don't like credit cards. Also, don't prepaid cards have tons of fees? I'm curious to get your perspective — and tips, if you have any, for teaching our daughter about money. – Rosie
Sounds like your Sweet 16 is still learning that money doesn't flow in an infinite supply from mom and dad. Nobody's automatically born with budgeting skills, so your daughter probably isn't particularly bad at budgeting — she just hasn't had to learn those skills yet.
Budgeting is a tough lesson for anyone to learn, no matter what age. Indeed, many adults are still working on that lesson, simply substituting credit cards or loans for parental cash infusions. However, budgeting is a critical life skill to learn, so yes, the sooner you and your husband can help your daughter learn how to match spending to “income,” the better off she will be once she moves away from home.
Is a prepaid card with a set spending amount a good solution? Well, it's understandable that you're concerned about your daughter getting hooked on plastic. However, prepaid cards are an entirely different animal and share no similarities with credit cards, other than being, well, made of plastic.
Prepaid cards are essentially just debit cards. The only difference between a prepaid card and a debit card is that while debit cards are linked to a bank account that the money is drawn from, with prepaid cards, money has to be preloaded onto the card account. Once the preloaded money is spent, it's gone, and there is no way to spend money you don't have, as you can with credit cards.
Because of this significant difference, prepaid cards can indeed be a great way to teach kids about money in general and budgeting in particular. Here are ways using a prepaid card to give your daughter her spending money might help:
- It takes you out of the line of fire. With cash, there is always the option to go back to mom and dad and ask for more money once the week's allowance is spent. With prepaid cards, if you are firm about sticking to the weekly preloaded amount, the burden is on your daughter to make sure there's enough money left at the end of the week for some weekend fun. She, not you, is on the hook.
- It's easier to track where the money goes. With prepaid cards, you can keep track of where the money was spent and how much is left. Your daughter can go online to track her spending (and, ahem, you can too, should you want to know where all that money goes). Many prepaid cards also feature a free SMS text feature to help track spending and account balances.
- Prepaid cards can be training wheels for credit cards. It may seem counter-intuitive, but prepaid cards can lay the foundation for good credit card management skills. Using prepaid cards develops the habit of associating plastic with a finite amount of money. And that, really, is the best way to approach credit card usage later.
The basic guide to sound credit card use is to never charge more than one can pay off at the end of the month. If you help your daughter graduate to a credit card down the road, simply show her how to calculate how much she can pay off at the end of the month. That will tell her how much she needs to limit her credit card charges — just as she's grown accustomed to limiting her prepaid card purchases. In that way, the habits she develops while using her prepaid card can be transferred to her credit card use.
While prepaid cards used to come with hefty fees, that is now changing, and there are now a few nearly fee-free prepaid cards on the market. Check out the American Express Pass Card, for example, which is specifically designed for teens. The card features no monthly fees, but it does charge $2 for cash advances (you get one free cash advance per month). So as long as your daughter knows to avoid taking out multiple cash advances each month, you can avoid fees altogether. Another fee-free card to look into is the USAA Prepaid card, which also comes with easy online access. USAA's prepaid cards are available to the general public, so you don't need to be a member of the military or be related to someone who has. The cardholder, however, must be under 21.
The more you support your daughter in this new venture, the more likely it is to meet with success. When your daughter runs out of money before the week is over (as she surely will), sit down with her and take a look at which expenditures she might have preferred to forego to have money for the things she can't buy now. Compliment her when she refrains from impulse spending, and show her how to postpone expenditures to stay within budget.
In addition, help your daughter set money aside for bigger expenditures, be it clothing, a concert ticket or a school trip. Bigger expenditures torpedo most people's budgets, so decide together with your daughter how much of her weekly allowance should be held back, so she will have the money for big-ticket items.
If you can withstand the temptation to load more money onto her card whenever she asks or to give her a little extra cash when she runs out, a prepaid card could be a fun and enjoyable experiment for all of you. In the process, you can help your daughter acquire some great financial management skills that she will surely thank you for one day. Good luck!
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