Before electronic payments came along, giving your kid an allowance was as easy as handing over a fiver come Friday afternoon. But technology has created new ways to transfer money from parent to offspring.
Prepaid debit cards, online bank transfers and other digital methods can prepare your child for a world that’s becoming less reliant on bills and coins. Noncash payments — debit card, credit card, bank transfers and check payments — grew by $17 trillion from 2012 to 2015, according to a 2016 Federal Reserve study.
Though cash is still best for youngsters, electronic transfers can impart valuable money lessons as kids progress through their preteen and teenage years.
1. Cash for the youngest
To teach young kids the basics of spending and saving money, nothing beats cash, says financial educator Roslyn Lash.
Cash “will give [kids] a real-life illustration of how fast money goes and how they need to be conscious of spending,” she says.
For a young child, trading a dollar bill for a candy bar can instill a sense of reality to money that electronic payments can’t replicate. And adding cash to a piggy bank until it can be traded for a videogame is often the first lesson in savings and delayed rewards.
Cash has its drawbacks; it’s easy to lose or accidentally run through the washing machine. But it’s the best way to introduce the concept of money to young kids.
2. Prepaid debit cards for the preteens
For kids who have mastered cash but aren’t quite ready for a bank account yet, try prepaid debit cards. These cards, which allow holders to spend only the amount of money that has been loaded onto them, might be right for kids ages 10 to 12 who are starting to shop or spend time with friends on their own, says financial planner Jennipher Lommen.
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Some prepaid cards offer safeguards for parents, such as limiting purchases only to certain types of stores or sending parents text alerts on account balances.
3. Bank account transfers for teens
As children mature into teenagers, opening a savings account and a checking account with a linked debit card can impart good spending habits before they fly the coop into adulthood. Because minors can’t open an account without a parent or legal guardian as a joint account holder, adults will be able to keep an eye on how much their kids are spending. Transfers from the parents’ account to the child’s account are easily done online.
A savings account can also teach children about interest, Lash says. Though the average U.S. savings account currently pays only 0.06% in interest, even a nominal rate will expose teens to the concept of investing returns. And seeking accounts that pay 1% interest or more, as those available at some online banks do, is a good way for your child to start learning about the differences in banking products.
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One caution: Regular debit cards can lead to overdraft fees if there’s not enough money in a checking account to cover purchases. (Most prepaid debit cards don’t have overdraft fees.) You can, however, opt out of overdraft coverage; retailers will just decline transactions if there’s not enough money in the account.
Also be careful of monthly fees. Some banks may reduce or waive fees for minors, but it’s best to look for an account without monthly fees.
Different kids, different timing
Choosing a method that fits your child is important.
“So many kids are different, even within one family,” Lommen says. “Different children can have different levels of impulse control and responsibility.”
Cash allowances are best for those who benefit from visualizing their spending — young kids or otherwise. For kids who have a tendency to spend impulsively, cash or a prepaid debit card that doesn’t allow overdrafts is ideal. Once a child learns not to spend everything they have at once and to plan for future purchases, they are probably ready for a bank account.
Ultimately, allowances should teach kids how to use money responsibly and prepare them for adulthood, where they’ll have to balance income with spending — whether it’s with cash, prepaid cards, or another futuristic form of payment yet to be invented.