Banking and your teen’s money
Money management mystifies many adults.
So how can preteens and teens, who are just beginning to earn and spend on their own, make wise choices?
Lots of parent-teen angst over money mishaps can be headed off if parents guide their children to the right bank products.
“There have been many studies showing that when kids own an asset like a bank savings account that they are more financially successful in adulthood,” says Lewis Mandell, professor emeritus in finance from the University of Buffalo.
Below is a look at four typical parental concerns and how the right bank products can foster financially savvy teens. And, since every kid is unique, there’s also guidance for parents on how appropriate particular bank products are for their teens.
Bank product: Plain savings account
Concern: You want your teen to save some of the money that he or she earns from chores or receives as gifts. A plain savings account can help.
Why it works: “Opening an account at a financial institution is important because it cements the idea that you invest accumulated money in a vehicle that doesn’t get tapped for spending,” says Susan Beacham, a former banker and CEO of Money Savvy Generation, which developed the “Money Savvy Kids Basic Personal Finance Curriculum.”
You don’t have to wait to open a savings account until a child reaches a preteen age, but act when he has an overflowing piggy bank, Beacham says.
Considerations: “Some parents think that because their kids will live in a high-tech world, they should select a bank that offers checking balances by phone,” Beacham says. But because parents “model” financial behavior for their kids, they should introduce their kids to a bank they’re comfortable with — perhaps the same place they do their banking.
No matter the type of financial institution, state law will dictate when a teen is a minor.
“It may be anyone under the age of 18 or 17,” says Nessa Feddis, senior vice president and deputy chief counsel of the American Bankers Association. Parents or other responsible adults will be required to be joint owners, guarantors or co-signers for underage teens.
Bank product: Prepaid card
Concern: You want your preteen to learn to responsibly purchase items he or she wants or needs without your supervision. Here’s where a prepaid card comes in.
Why it works: Tracking how much money you have left after making purchases may sound easy, but it’s hard to master. “There’s nothing better than paying with actual dollars and then counting how many bills are left,” Beacham says.
But face it, some kids can’t develop “money discipline,” says Deana Crawford Arnett, a financial planner with Rosenthal Wealth Management in McLean, Virginia.
Their peers may have graduated to owning a checking account, but some teens may need practice with a prepaid card. It can be used like a traditional debit card, but spending can’t go over the amount loaded on the card.
Considerations: Available through many banks, retailers or online providers, prepaid cards are marketed as a helpful banking tool for the financially challenged. They can carry fees, like a charge for a PIN-based transaction, which can add up to a tidy sum, especially if a teen isn’t skilled at following rules to avoid fees.
Bank product: Student checking
Concern: Your teen started working and will make more deposits and purchases. Or, he or she is off to college soon, paying for books and more. A student checking account with low minimum deposit requirements and bank fees and accompanied by a debit card would be best.
Why it works: After they’ve practiced spending with cash, teens should be able to track a checking account balance, Beacham says.
Not that they will use an actual check. “They’ll pay with their debit card,” says Mandell.
Feddis says that student checking with minimal fees is often available. When teens are introduced to checking or other bank products, checking fees and how they’re assessed is a good financial lesson, Mandell says.
Considerations: Overdraft charges are the biggest fees, Mandell says. “You don’t want teens to get into debt (from overdrafts),” he says, advising against opting in for overdraft protection. Banks are prohibited from charging overdraft protection fees unless a customer opts in.
Feddis says that when parents are on an account with a minor, they can view balances online.
Cary Whaley, president of the Independent Community Bankers of America, says that if parents have a separate checking account at the same institution, they can transfer funds to their teen’s account.
If parents bank at another institution, banks are increasingly adopting payment systems where transfers of funds to different banks can be accomplished in two days.
Bank product: Certificate of deposit
Concern: Your teen has built up a savings account and is hoping to buy a car in two years. The next level of saving might be a CD.
Why it works: In the wake of the financial crisis, interest rates paid on savings accounts and CDs have been dismally low. But for teens, the lesson of matching an investment vehicle to meet a specific goal is worth more than the yield, says Ken Cyree, professor of finance at the University of Mississippi.
“Setting short-term and long-term goals are central to financial planning,” he says. And putting money in a CD carries very little risk unless money must be withdrawn early. Keeping money in a CD for the full term ensures that funds will be available when it’s time to buy.
Considerations: Some teens, hearing news reports about the Dow Jones industrial average reaching new highs, might be eager to invest in stocks, Mandell says. If they have some money to put at risk, buying a limited number of shares of a mutual fund, exchange-traded fund or individual stock can be a great learning opportunity and just might be the start to a lifetime of asset building.