Today, that option no longer exists, but you can help your child experience the savings process by setting up a savings account at a local bank. Having a savings account at a local bank will show your child two important things:
Where money is kept. While most of the bank’s money isn’t physically all at your local branch (it’s reinvested in other assets, such as loans to customers), the bank is still the place where deposits are made. What interest is all about. Interest is income earned on your money. When a deposit is made in a bank, you essentially are giving the bank the use of your money. The bank lends it out as mortgage money or for other loans and then charges the borrowers interest. For the use of your money, you earn interest.
Bank savings accounts show your child some very important money management elements. These concepts underlie any type of investment decision’s she’ll make throughout her life.
Making deposits and withdrawals. You can show your child deposit and withdrawal slips used for these transactions and how to fill them in. Safety. When we think of safety, we picture avoiding accidents and getting injured. Well, it’s really the same thing with money. Safety means that your child won’t get injured financially by putting his money in a bank. The investment is safe, and he can count on being able to take out what he has put in (and then some). Money in most banks today is FDIC-insured up to $100,000. (Make sure that your child’s bank has this protection by looking for an FDIC sign in the window or by asking someone there.) FDIC is a quasi-federal agency that promises to pay what’s in each account—up to that dollar limit—if the bank should experience financial difficulties and fold. It’s a form of insurance. Liquidity. This doesn’t mean that the money turns into liquid gold—it refers to access to money. Your child can take the money out of the savings account at any time, and there are no penalties for doing so.
While savings accounts offer safety and liquidity, there’s a price for these benefits: a low return on the money. As your child becomes willing to sacrifice some safety or some liquidity, she’ll be able to get a better return. Some alternatives are explained in Teach Kids About Investing Their Savings; other types of investments are explained in Teach Kids to Diversify Their Investments.
Starting a Savings Account of His Own
If your child has been to town, he knows the whereabouts of a bank or two. But what he doesn’t know is what type of account he’ll be opening and how to go about doing it. Two types of bank savings accounts exist: statement accounts and passbook accounts.
Statement accounts provide your child with a monthly report of what has happened to the account. It shows money that has been deposited, withdrawals that have been made, interest that has been credited, and any fees charged against the account. Passbook accounts give your child a little booklet that every transaction is entered into. Whenever money is put in, the deposit must be posted in the passbook.
Some checking accounts pay interest (these may be called NOW accounts.) However, these accounts aren’t designed for savings; they’re used to write checks to pay bills, and the interest is only an extra feature of the account. Using checks is discussed in Teaching Kids About Using Checks.
