A Teen’s Guide to Banking
As you get older, you will start to have more and more access to cash. Maybe you’ve even started your first job. You may work just so that you can have some extra cash to spend. You may have bills to pay, such as your car payment or insurance, or you may even have to help your parents with the bills. Perhaps you don’t work yet but get a nice allowance. However you come by your cash, learning good financial skills and putting them into practice can set you up for a great financial future and possibly save you a lot, and I really mean a lot, of tears later on in life. But don’t stress just yet! By the time you finish this article, you’ll have a good handle on handling your money! Why Use a Bank Aside from simply offering convenience, banks offer safety. Imagine if banks didn’t exist and you had to carry your cash around with you. It wouldn’t take long to attract the wrong kind of attention if you had to flash a stack of bills every time you bought something. If your cash is stolen out of your wallet, there’s little chance of recovery. However, if your debit card is stolen, banks offer certain protections, and in many cases you can recover most, if not all, of your funds. On top of that, the government even insures the money in your account against bank failure. If your bank goes out of business, the government, through the Federal Deposit Insurance Corporation (FDIC), will insure an individual for a maximum of $250,000, which means as long as you have less than $250,000 in your account, you won’t lose a dime! Now, if you are one lucky teen and have more than $250,000 to worry about, there are plenty of ways to structure your funds so that it can be fully insured, like adding a joint owner or a beneficiary to your account. Choosing an Account There are a couple of questions you should ask yourself before opening an account. How much money do you intend to keep in the account on a regular basis, and how many transactions do you plan on having during a month? These answers will help you determine if you need a checking account or a savings account. Checking Accounts Checking accounts usually offer unlimited transactions. Many banks will have at least two or three different checking products from which you can choose. You can request a Truth‐in‐Savings disclosure for each product type to help you compare the accounts. These disclosures will inform you of any fees the account may be subject to, such as minimum balance requirements, e‐statement requirements, and monthly maintenance fees. Compare the accounts to determine which account best meets your needs. If you need help, you can always ask the customer service rep. They are there to help! Savings Accounts Savings accounts are meant for just that—to save! Banks restrict the number of withdrawals allowed from savings accounts, usually on a quarterly basis (3 month period). If you go over the number of allowed withdrawals, you can quickly add up fees. On top of that, the government actually limits some types of transactions on savings accounts. Exceeding the number of allowed restricted transactions not only results in fees, but your account may be closed. Be sure to read the Truth‐in‐Savings disclosure to know the transaction limitations and consequences for not adhering to the rules before opening a savings account. If you think you may have trouble sticking to the limits, it’s probably best to just open a checking account instead. Understanding Overdrafts It is really important that you understand what happens when you spend more money than you have in your account—remember those tears I talked about earlier. Any time an item, such as check, withdrawal, etc. tries to clear your account and there is not enough money in your account to pay the item, it creates an NSF situation. Each item will be charged an NSF Fee or Overdraft Fee depending on whether the item is paid or returned. Banks usually charge between $20 to $40 per item. If the bank makes the decision to pay the item, it will overdraw your account, or in other words, create a negative balance in your account that you will have to repay to the bank. Or, the bank may choose to return the item back to the merchant (the store or person you were trying to pay) as NSF. Generally, the merchant will attempt to process the item a second time, potentially causing another fee if the money still isn’t in the account. If the money still can’t be collected, the merchant may charge you a fee for writing a “hot check”, post your name on a list of bad customers for everyone to see, or worse yet, the merchant may choose to prosecute you. Writing “hot checks” is against the law in many states, including Arkansas. The term “hot check” is used when the payment method is not any good. The item does not necessarily have to be a check. Overdraft Protection Programs Some banks offer an overdraft protection program. Typically, the bank’s overdraft protection program will pay checks and other withdrawal up to a certain dollar amount, such as $500, when there is not enough money in your account. However this can come at a really high price. Usually, each item will still be charged an Overdraft Fee (usually $20 to $40 per item) and you will have to repay the bank for the entire amount owed within a specified number of days. If you aren’t able to repay the full amount in time, you may be reported to a credit bureau and possibly a collection agency. This can have a very long‐lasting, negative impact on your credit score, which can affect your ability to buy things later in life, such as a vehicle or a house. So what about overdraft protection for your debit card transactions? The bank cannot allow your debit card to intentionally overdraw your account for certain types of transactions, such as day‐to‐day and ATM transactions, unless you give the bank permission by opting in. If you don’t give permission, when you attempt to use your card and there is not enough money in your account, your card will be declined. Sometimes on occasion, there is a timing issue with the way things post to your account, so if the debit card transaction causes your account to be overdrawn, you will not be charged the overdraft fee. If you do choose to Opt In and give permission, the transactions will be approved up to the overdraft protection limit and you will be charged an overdraft fee for each item. Be sure to read the disclosures and have a solid understanding of the bank’s overdraft program(s) before enrolling. Again, a customer service rep can answer any questions you may have, and be sure to ask about alternatives the bank may offer. Balancing Your Account The best thing you can do is to not spend money you don’t have, and the best way to do that is to know exactly how much money you have. Read the article titled “The Balancing Act” to learn how to balance your checkbook. Save, Save, Save Save as much money as you can! While it’s tempting to use your cash to purchase all of the latest and greatest items on the market, you’ll have a jumpstart on life if you are able to stash away some cash for the big items that come later in life, such as a down payment on a house. Make a budget and stick to it! Read the article titled “Budgeting for Financial Success” to learn about budgeting.