How Prepaid Cards Can Help Your Child Learn Money Management

Parents often have to temper their kids’ enthusiasm for the latest, greatest hot new trend. After all, momentary must-haves like Beanie Babies, Chia Pets, and Pogs are usually quickly forgotten, leaving only a depleted bank account in their wake. Interestingly, the best way for parents to teach their children certain key financial lessons involves buying into the biggest trend in personal finance right now: the rise of prepaid cards. But don’t worry, prepaid cards aren’t a fleeting trend.

Prepaid cards, long a checking account fill-in for unqualified consumers, have risen to prominence of late thanks to the Federal Reserve capping debit card swipe fees. With debit cards no longer quite as profitable, banks were forced to cut rewards programs, raise checking account fees, and encourage their customers to use unregulated alternatives.

The fact that prepaid cards offer the same features as the traditional combination of a checking account and debit card – save for the physical checkbook – not only leaves them perfectly positioned to fill the growing void, but also makes them powerful teaching tools for young people given that they do not pose the risk for account overdrafts and bounced checks.

At this point, you might be wondering why kids even need financial instruction, perhaps believing that they’ll simply pick up whatever they need to know along the way. The truth, however, is that the state of financial literacy in the United States right now is dismal and was, without a doubt, a factor in the widespread overleveraging and reckless borrowing that helped bring about the Great Recession. The prospects for the future aren’t especially bright either, as more than 70% of US parents don’t believe their kids know the basics of money management, according to the 2012 Global Financial Literacy Barometer.

A Recipe for Teaching Children Money Management

With that in mind, let’s waste no more time in addressing the recipe, so to speak, for turning your child into a financial whiz kid:

1. Teach fee consciousness.

Card Hub’s research has identified the Kaiku Prepaid Card as being one of the best for teaching financial literacy given that its only notable fee is a $1.95 monthly maintenance charge and it offers the ability to make ATM withdrawals at AllPoint’s 43,000 locations nationwide as well as purchases anywhere Visa cards are accepted for free.

You want to give your child ample opportunity to make transactions for free, after all, while ensuring they will incur some sort of small financial penalty if they manage their account carelessly. For example, when Kaiku cardholders made withdrawals at non-AllPoint ATMs, they stand to incur fees that amount to roughly $4.00.

2. Require budgeting.

Kids are often careless with their parents’ money, but watch what happens when they get a bit of their own. They’re likely to put it behind lock and key. That is why you should allow your child to spend money (through providing a commission for chores, for example). This will naturally teach them to how to make a budget.

3. Turn your child’s spending habits into a teaching opportunity.

Prepaid cards offer online account management, which means you can review your child’s purchases with them and discuss the difference between necessities and luxuries, the value of comparison shopping, and how to eliminate impulse purchases.

4. Take things up a notch.

As is the case with any type of training, it’s important to gradually increase difficulty so as to prevent boring or overwhelming the trainee, in this case your child. Once he gets a hang of basic budgeting, you can adjust how much money your child manages as you deem appropriate.

5. Graduate to checking accounts.

When your child is clearly able to spend his money wisely and use his prepaid card strategically in order to minimize usage costs, open a checking account a separate checking account and begin using it as a way to teach your child about managing money. Make clear the repercussions associated with bouncing checks and overdrawing the account and progress in a similar fashion as with the prepaid card.

It’s often said that the best investment we can make for the future is in our children. That’s why we should make sure to spend enough time and effort teaching our kids what they need to know in order to attain financial security when they leave the nest. While this might require a bit of continued learning on our parts – studies show that most of us aren’t too confident in our financial prowess – it’s worth it, especially since we’d all certainly benefit from improving our own financial performance.

Do you think that prepaid cards are a good teaching tool for children? Is there a better alternative? Leave a comment!

This guest post was written by Odysseas Papadimitriou, CEO of Card Hub, a website that helps consumers compare prepaid cards, and Wallet Hub, a social network dedicated to personal finance.