Banking Primer for Teens

While teens may act like they know everything, most would admit they probably need advice when it comes to money management. Understanding the specifics of various types of banking accounts, how to meet financial goals, and ways to stay out of debt are all useful life lessons. Here’s how to talk to your teen about financial management success.

What are the three main types of bank accounts?

Teens have the option to open any one or all of these banking accounts: checking, savings and money market. Each account type has its own rules, requirements and role to play in money management.

Checking accounts: Designed for everyday access

Checking accounts are used to pay for everyday purchases, such as bills, groceries and gas. Teens can access their funds with an account number or a debit card, deposit checks and electronic payments, and transfer funds to and from other accounts.

Most checking accounts:

• Require little to no funds to open
• Allow access to ATMs with little to no fee
• Offer 24/7 online and mobile banking

Account holders receive monthly bank statements, which provide a way to track spending.

Savings accounts: Longer-term money management

A savings account is designed to help you grow your finances. These accounts offer an interest rate on your balance, which can range from .02% to 4% or higher, depending on the financial institution. (Note: High-interest savings accounts are usually offered by online banks.)

Most savings accounts:

• Require a minimum amount to open
• Require a minimum balance to keep the account open
• Limit the monthly number of withdrawals, transfers and deposits
  

Money market accounts: Savings for tomorrow

Want to save for a rainy day? Then consider a money market account Like a savings account, a money market account provides interest, but the rate is typically higher—and so is the minimum required balance. In most cases, the higher your balance, the higher the interest rate you’ll earn. 

Most money market accounts:

• Require a minimum amount to open
• Require a minimum balance to keep the account open
• Limit the monthly number of withdrawals, transfers and deposits

What you need to open a new account

Most financial institutions make it a snap to open a new account in person or online. You’ll need:

• ID (driver’s license)
• Proof of address
• Social Security number
• Initial deposit (amount will depend on account type)
• Parent or guardian co-signer if you’re under 18

Once the account is set up, don’t forget about mobile banking. Most banks have a proprietary app that you can download and set up for mobile capabilities.

Credit cards vs. debit cards

The main difference between a credit card and debit card is where the money is withdrawn from.

A debit card is linked directly to your checking account. When you make a purchase, the funds are immediately withdrawn. A credit card is linked to funds you can borrow, but unless you pay back the funds in full at the end of the month, you’ll pay interest on the outstanding balance.

How do you successfully manage debt?

To establish a credit history, you have to acquire debt. But to establish a good credit history—and a good credit score—you must successfully manage that debt. The two most important rules of thumb for debt management:

• Only buy what you can truly afford (creating a budget can help).
• Pay your credit card balance or loan payment on time each month.

An outstanding credit card balance or loan payment will add up and grow over time. And neglecting to make payments will negatively impact your credit score. Why does that matter? Because a negative score has implications for future money management: It can mean higher interest rates on loans and credit cards, make it more difficult to secure a loan, or even keep you from getting insurance or renting an apartment.

Building good habits

It might have started with an allowance or a piggy bank, but establishing good money management throughout the teen years is important. Set a savings goal—something small like a new pair of must-have boots, something bigger like a ski trip or something monumental like a new car—and commit to setting money aside. Think of the joy and confidence that comes with meeting the goal. Smart money management will stick with your teen as they go off to college—and be a part of their everyday life in the real world.