Banking Basics For Kids
Banking is an area that is seeing a lot of changes. With the introduction of Block Chain we can expect to see new ways of banking and new technologies emerge. This will most likely be the ‘norm’ for your child or teen in the next decade.
In this article however, we will focus on the more traditional or foundational aspects of banking. Systems and technologies that you as the parent are most familiar with. Specifically we will look at types of banking accounts, online banking and interest.
Having a strong foundation in traditional banking will help your child or teen (and you) when the transition comes. Most likely it will also be what they will continue to use for the coming decade.
The Physical Bank
Most people know what a bank is. Traditionally it has been a safe place to keep our money.
Banks have been around for a long time. In fact the first type of bank can be traced back to Roman times. The first bank in America opened over 200 years ago in 1791.
At present most people are using banks to keep their money. You probably have banks in your town or city, you may even go regularly to visit the physical branch.
Types of Bank Accounts
There are many different types of banking Accounts. The most popular types of accounts are:
1. Transaction Account
2. Savings Account
Transaction Account
A Transaction Account in some countries can also be called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions.
A Transaction Account is a deposit account designed for frequent use. It is the account that say your wage or student payment may go into. You can then pay bills, buy food, buy fuel for the car, make cash withdrawals and such from this account.
Most Transaction Accounts will come with a plastic card that you can use, these are called Debit Cards. You can use debit cards pretty much anywhere to pay for pretty much anything. You can also use your Debit card to draw out cash from an ATM (Automated Teller Machine).
How do Debit Cards work? You swipe your card and your purchase is automatically deducted from your checking account. Nice and simple.
Fun Fact: Most people say ‘ATM Machine’ but this means that they are actually saying Automated Teller Machine Machine.
Savings Account
Unlike a Transaction Account, which is specifically for regular day to day use, a Savings Account is an account used to hold money that you do not need right away.
It’s smart to have a separate account that you don’t need for everyday spending where therefore you can SAVE your money and let it grow over time.
So if you are saving for something, maybe a holiday or a gift, or a down payment on a car or a house, most people will open a savings account purely for this reason.
It’s also worth mentioning that you do not get a Debit Card with the Savings Account, therefore it is not as easy to spend the money in your savings account.
Your child or teen want to save … not spend!!
Most Savings Accounts will give you additional money in return for opening a Savings Account at a bank. It may not be much but it will be a little, and the bank will give you this free money to encourage you to keep using them. This free money is called interest.
What Is Interest On A Savings Account
Before you open a Savings Account, check with the bank to see if they offer interest on a Savings Account. If they don’t you should shop around and find a bank that does.
How Does it Work?
Every year the bank will look at how much of your money you have kept with them and they will give you a small percentage of it. This is often offered as a ‘thank you’ and to try and encourage you to use them even more. How much they will give you is based on the interest rate.
It’s worth mentioning that in most cases you will not get interest on a Transaction Account. In fact, most of the time you will pay a FEE either monthly or annually for the privilege of having that account. However, a savings account will pay a small amount of interest every year.
Here is an example:
Imagine you have $5000 in your savings, and the bank offers an interest rate of 1% = 1% of $5000 = $50.
This is often the first experience your child or teen will have of their money making money so it is worth it to shop around for the best interest rate on a savings account as possible.
Online Banking
Online Banks are becoming more popular. They are something that has only started in the last 10 or 15 years or so. Online Banks offer the same services as physical banks with one exception, most of the time they do not have a physical location.
Many teens and young adults have Online Banking accounts and manage all their banking business via a laptop or an app on their mobile phone.
You can still have a Transaction Account and a Savings Account with an Online Bank but because often there is no physical location an Online Account can often have better deals. This is because there are no branches or offices, or physical address, therefore an online bank can save money on things that they would normally spend money on like rent, rates, bills etc and pass those savings onto us, their customers.
There are some banks that only exist online and there are also some physical banks that offer special deals to use their online services, for example, often you will get alot better interest rates on savings accounts if you use an online bank.
Summing Up
Let’s do a quick recap ...
A Transaction account is used for day to day, frequent use, where money comes in, like your wage and money goes out, like to pay bills.
A savings account will be a bank account where you put money that you do not need for everyday spending.
Internet Banking is gaining popularity and many young people are using them for both their transaction and savings account.
We hope your child or teen are enjoying learning about Money!
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You’re prepared to EDUCATE yourself and your child or teen to become financially smart.
You understand that how much you EARN is directly related to how much you LEARN.
ALL great leaders and those that are successful -- spend time LEARNING.
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