Maybe you have opened a savings account for your children as a way to build good financial habits and sock away money for college. But as they grow, your kids will need to learn plenty of other money basics, first and foremost how to manage a checking account.
Starting a checking account early for teens is a good way to avoid financial pitfalls later in life. Indeed, 15-year-olds in the U.S. with a bank account scored 22 points higher on a financial literacy questionnaire than those who do not, according to a 2017 report from the Organisation for Economic Co-operation and Development.
The study, which is conducted every two years, looks at financial literacy among 15-year-olds in 15 countries. The study also found that 22 percent of students in the U.S. did not reach the baseline for financial literacy proficiency.
“One variable that helps a young adult build their financial capabilities is to get involved early with a bank account,” says Paul Golden, spokesperson for the National Endowment for Financial Education. “Parents and children should work together to do their homework and find an account that is right.”
Here, are five things you should know about opening a checking account for your teen.
Get started at the right age
Many banks allow customers to open checking accounts starting at the age of 13, but some believe the best time for your teen might coincide with other milestones, such as a getting a part-time job or learning to drive.
There is a new big milestone these days: a child’s first smartphone. Because commerce is becoming so digital, it is important to teach kids how to spend responsibly online. You might need to consider starting a little earlier by getting your tween an account. For instance, Young Americans Bank in Denver, which exclusively serves people under the age of 22, is now eyeing 10 as the right age to get a checking account.
“It used to be 12 to 14; 10 seems incredibly young, I know,” says Richard E. Martinez, Jr., president and CEO of Young Americans Bank and its affiliated Young Americans Center for Financial Education. “But first cell phones come in that range and they are shopping on the web.”
Essentially, if you feel your kid is mature enough for a smartphone, he or she is probably mature enough to learn to manage money.
Know your options
A variety of banks offer teen accounts, so it makes sense to shop around. Many banks, including TD Bank, offer student checking options that have no minimum balance or charge no monthly fee. Most of those accounts are limited to people younger than 24.
Check for features that will click with tech-savvy teens. Look for perks such as free direct deposit, mobile banking, e-statements and a debit card. “Shop for an account that has no balance requirements and the lowest service charges,” Golden says.
Some accounts will let you transfer money from your account to your child’s checking, making it easy to get money to your teen.
Also, opt out of overdraft protection. Your teen might be rejected by a merchant at the point of sale because of insufficient funds, but you’ll avoid the overdraft fees, which average $33.38 per instance, according to the 2017 Bankrate checking account survey.
It doesn’t hurt to keep in mind where your child might want to attend college, so that you can pick an account where there will be branches and in-network ATMs nearby.
Set up accounts together
If possible, link your child’s savings account to the new checking account, says Allan Prindle, CEO of Power Financial Credit Union in Miami. Then, walk your child through the process of depositing money earned from jobs, birthdays or allowances to the account.
Remember that while your child has watched you swipe a debit card for years, he or she may not fully understand how the transaction works. Show them how after the card is swiped, funds are deducted from the account. Hang on to the receipt until the transaction goes through.
“Show your children how you manage your account, how often you reconcile, and how you track your spending,” Golden says. “It is difficult teaching kids in a cashless society show them how money electronically moves through your account.”
If the bank allows you to deposit checks through a smartphone or tablet, show your child the steps involved to take advantage of this feature. It’s also important that your child comprehends the gravity of the product.
“Make sure your child understands that they are entering a binding agreement with a financial institution and that they understand all of the potential fees—from overdrafts to ATMs,” Golden says. “Young adults also need to be clear that there are implications for misusing the account.”
Since your child can’t enter a binding agreement on their own, you’re also on the hook for their behavior. You need to know what’s going on.
“This is particularly important over the first few months, so that you can help your child identify mistakes and learn to self-correct,” Golden says.
Many institutions have a daily debit card limit for protection, notes Prindle, and “you can customize the amount charged on a card during the day.” Try starting small with a limit of $50 or $100 a day. Also consider setting restrictions on ATM withdrawals, beginning with $50 a day.
Besides setting spending limits, some institutions like Credit Human, a credit union in San Antonio, allow you to limit spending by geography or type of retailer.
Account alerts, such as those that send you a text message when your account falls to a certain level, are also a great tool to monitor activity.
By monitoring, you can also look for opportunities to help your kids make better choices. They might think that a meal at Chipotle or spending 99 cents on an extra life on a smartphone game is fine because they had the money to cover it, but you can show them how the money could have been used better.
“That is what I’ve done with my kids. I have set expectations on the way they manage their money because they habits they establish could be with you for the rest of your life,” Martinez says. “And those 99-cent purchases add up.”
Make it a learning process
Digital tools should make it really easy for your child to stay on top of their balance and double check they are not overspending.
Although that on-demand information is great, Martinez wants you to teach your child how to balance their checkbook in a written registry. That might seem really out there, but Martinez says it is a great way to shatter the ephemeral view of money.
If you rely on checking your balance every day to see if you have enough money to cover your expenses, you’re not looking out ahead, he says.
“If they aren’t writing it down, they are focused on the short term and we need to focus on longer-term planning—what are my obligations in the future? Have I planned out my week? When is the next time I’m going to get a paycheck?” Martinez says. “Instead of living in the moment, this will teach them future life planning.”
This might turn out to be a learning experience for you, too.