Are prepaid cards effective budgeting tools?

May 28, 2021 11:56:54 AM

As a national nonprofit guiding people to financial health and wellness, our partners at GreenPath often get questions about the use of prepaid cards to help manage monthly budgets. In this post, they share some important things to think about when it comes to prepaid cards.

The journey to financial wellness is smoother when people take the time to create a budget. That’s the best place to start. After making a budget, it will become clearer what a person’s specific financial situation is. What are the monthly budget line items? What is the monthly income? How much consumer debt must a household manage? What other debt must the household manage? Does the household have any emergency savings? All these considerations must be tracked to understand the full picture.

As an example, if it is tough to keep up with monthly payments on consumer credit cards, a good option is to manage monthly expenses with cash, or the equivalent of cash such as a prepaid card. Again, there is no “one size fits all” here.

Key Considerations of Using Prepaid Debt Cards

The idea of using prepaid debit cards as a way to help budget is dependent on a person’s individual situation.

While everyone’s situation is different, it can be helpful to review some of the key considerations such as:

  • Can help build in budgeting discipline: It could be helpful to allocate a certain amount in a budget to purchase a prepaid debit card at the beginning of the month. The card is not tied to any existing checking accounts. You’ll be aware of the balance of the card after each purchase, which builds discipline since there is only a set amount of funds available. Whether the card is used for any unexpected purchases that come up, or recurring expenses, when the balance is depleted, no more purchases can be made.
  • Helps manage recurring purchases: There are benefits when people purchase store gift cards each month, for instance at a grocery store or pharmacy that they visit regularly. That way, they can budget for monthly food or medicines as they use the store gift card for purchases each month. It might even be possible to benefit from “frequent buyer points” when purchasing gift cards to earn points or future discounts at a favorite store.
  • Offers security: Prepaid cards can be a better alternative to cash for security reasons. As an example, with some cards, it’s easier to track purchases as they happen. Some cards offer fraud protection, and GreenPath encourages people to understand if that benefit is offered. In addition, they remind people to make sure that the pre-loaded funds are FDIC insured which is available with some cards.
  • Provides options, various fee structures: GreenPath encourage people to take the time to understand how to purchase and use a prepaid card. Typically, the cardholder loads funds they want to spend on the card. Some cards require an activation fee, so they advise people to get all the information on fees so there aren’t any surprises. As noted, a prepaid card works much like a debit card in that it can be used at retail stores, plus it is also important to know if the card can be used to withdraw funds from an ATM which can be useful, especially when traveling. A good way to understand all the options is to test out the use of a single prepaid card to jumpstart the process of monitoring and managing spending.

Start with a Budget

All in all, prepaid cards can be an option to help people establish effective money management habits. But as has been noted, each person’s financial situation is different.

Whether prepaid cards will be useful or not, understanding the full picture of a person’s financial situation is the best approach.

GreenPath suggest that the first thing to do is to understand a household’s overall financial situation to put money to work for larger goals. To get started, this simple worksheet can help people get an idea of what they have to work with, what their commitments are, and what they have remaining to devote to goals.

Tags: Money Tips, Budgeting