At some point, parents have to let their teenage children take the wheel, trusting that they'll make responsible decisions on the road. The financial road, that is.
Teens often are on their own when it comes to money — and that can be dangerous. But having parents tightly controlling the purse strings keeps them from developing smart spending and savings habits early on.
One way to give your kids financial freedom while still maintaining some control is to use a prepaid debit card for teens.
It works like a regular debit card but is linked to an adult's checking or savings account. Teens can't spend more than what's on the card, and parents can track purchases and set boundaries on how much kids can spend and where they can spend it.
"It's like having a governor on the gas pedal," said Greg McBride, senior financial analyst at Bankrate.com. "You put limits on how fast they can go."
Financial-services firms are actively promoting prepaid, or "reloadable," cards for teens. Several banks, including Wachovia, U.S. Bancorp and National City, offer the Visa Buxx card. Discover Financial Services' Current Card is linked to a parent's checking or money-market account.
Meanwhile, American Express has a program that allows parents to set spending limits on charge cards connected to their accounts. Even online payment site PayPal is in on the action, with a student account that is linked to a parent's existing PayPal account.
Prepaid debit cards ideally encourage healthy conversations about money. But like any tool, they can be misused. Fees, penalties and terms vary among card providers, and charges add up quickly if you're not careful.
Here are five ways to help your teen use a prepaid debit card wisely:
Why allow a debit card? Because your child's friends have them? To make it easier on you? To develop healthy money habits? All of the above?
Be realistic about your teen's maturity, said Nathan Dungan, founder of counseling firm Share Save Spend, which teaches families about money matters. It may be that cash is more appropriate — it's tangible and if you don't have it, you're out of luck.
"It's a big responsibility to put a piece of plastic in a child's hand," Dungan said. "When a person uses plastic instead of cash, they spend more. Some 12-year-olds are more ready for it than some 15-year-olds."
Can the card be used anywhere or only for specific stores and Web sites? Do all purchases need your approval? What are the consequences for breaking the agreement?
The clearer you make the parental controls upfront, the better. But including your kids in the decision-making process will likely result in less pushback. Review the plan every month or two — and be open to modifications as kids' needs change.
The first step is to decide how you want to fund the account, said Don Fotsch, a vice president at PayPal, and himself the father of six. Will you give an allowance, filling the card every month or every week? Or, will it be an on-demand program, where your kids call or text whenever they need money? Maybe the card is tied to household chores, so no money is added until the work is done.
"You're looking to guide your child down the path of appreciating the value of a dollar and making good trade-offs toward financial responsibility," Fotsch said.
Making a list of what you want is more fun than itemizing what you've spent. But teens need to track expenses, either online or with old-fashioned paper and pen.
"What their balance is and what they think their balance is may be two different things," Dungan said.
The lesson here is that money isn't free — and neither is the prepaid card.
Depending on the provider, a prepaid debit card can have fees for account activation, and for monthly or annual membership, as well as for withdrawing cash and viewing account balances at an ATM. And even though spending is capped, some cards will impose an overdraft fee in cases when a preauthorization is given, such as at a gas station, and the total bill is more than the amount on the card.
Parents can monitor balances online and getting email or text message alerts for every purchase. And check in with your teen to make sure they're up to speed with their spending and how much is on the card.
Make it clear that debit cards — prepaid or otherwise — don't offer the same automatic protection as credit cards. Yet if the debit card is lost or stolen, report it immediately; some providers, including Discover Current, PayPal and Visa Buxx, will not hold you liable for unauthorized transactions and will refund your money.
Tell your kid to put the card in his or her wallet and to leave their wallet in a regular place. Away from home, they should keep the card locked in a secure spot if they're not going to use it. Teens should also make sure no one has access to their account information or PIN.
"That should be part of the ground rules," said Dungan. "The debit card is the training wheels for learning to use a credit card."
Understanding the value of money? Priceless. Have regular family "money meetings," and don't hesitate to talk about your own challenges around spending and saving. What you find out may be surprising.
"There's a tendency to underestimate kids' ability to learn and absorb," said Bankrate's McBride. "These are the same 14-year-olds who fix the computer every time it freezes. They're certainly capable, but somebody has to give them the basics before turning them loose."