You’ve seen your parents log into their bank app. You’ve heard them talk about their accounts. And you’ve been to the bank with them more than once.
Of course, you’re wondering how bank accounts actually work – and it’s an excellent question! We love to answer smart questions about money. That’s why we put together this kid’s guide to bank accounts. It covers everything you need to know, so you can finally understand how bank accounts work and why they’re important.
How Banks Work
Banking systems started thousands of years ago when moneylenders offered merchants a place to store their goods. This helped merchants travel without carrying their cargo on camels. In exchange, moneylenders gave merchants a note that listed everything that was in storage and the merchants paid a fee for the service.
Today, banks still offer a place to keep your money safe. But, instead of just keeping your money in a box, they lend the money to others.
Yes, we know you’re probably thinking “I don’t want the bank to lend my money! What if the other person doesn’t give it back?”
We get it. But before you vow never to deposit a penny in the bank, you might wanna keep reading. There’s something in it for you.
In exchange for borrowing your money, banks pay you a little extra. This is called interest and it’s a way to earn money just by keeping it in the bank. Sounds like a good deal? Here’s how it works:
Let’s say you open a bank account with $100. By opening the account, you give the bank permission to lend your money to others – just while you’re not using it. In exchange, the bank will pay you 2% every year that you keep the money in the bank.
Then, they take your $100 and let a business owner borrow it. With this money, the business owner can buy products to sell at their store. But this person has to pay 7% for every year that they borrow the money. Of that 7%, the bank pays you 2% and they keep the other 5% for themselves.
In a nutshell, that’s how banks work. It can be a win-win situation for everyone involved: you earn money for your deposits, the business owner gets the money they need to run their store, and the bank makes a profit for the services they offer.
Why Banks Are Good
As you saw from our example, banks are good because they help you earn money and let others borrow money when they need it. There’s more, though! These are some of the reasons why banks are good for the economy and they’ve been around for so long:
Banks Help People Manage their Money
These days, banks do more than just store your cash or let others borrow money. Banks also make it easy for customers to transfer money from one account to another, make payments at the store, or use their money when they travel to other places. Just imagine how difficult all these transactions would be if bank accounts didn’t exist!
Banks Keep Your Money Safe
There are many rules in place that make banks responsible for the money that you deposit. We won’t go into the legal details, of course. But, basically, this means that even if the bank lends out your $100, they must make your cash available whenever you want to withdraw it. And if the bank goes broke, the law says that they still have to pay you your money.
Benefits of Having a Bank Account
You might think that bank accounts are for adults and that your money is just fine in your piggy bank. That might be true while you’re little but, as you get older, these are some of the reasons why you’ll need a bank account:
Safety
If your grandparents send you a $20 bill for your birthday and you use it to buy a $3 milkshake, you’ll get $17 back in change. It’s easy to put that money in your pocket and forget all about it. Then you get home, put your jeans in the laundry basket, and your money ends up in the washer. Or, as you walk back home, those bills fall out of your pocket and you lose your cash.
If you had a bank account, you could deposit those $20 and use your debit card to buy the milkshake. This means that you only pay $3 with your card and the other $17 stays safe in your bank account – where you can misplace them.
Convenience
We’ve already mentioned the convenience of using your debit card to pay for purchases at stores. But, with your parents’ permission, you can also use your debit card to buy products online.
Adults also use their bank accounts to pay bills, transfer money to other accounts, or withdraw cash at the ATM.
Record-Keeping
Sometimes, it’s easy to go to the mall and lose track of how you spent your money. You might get a t-shirt at one store, shoes somewhere else, lunch at the food court, and then dessert at a different shop.
You might not remember how much you spent by the end of the afternoon. But if you have a bank account, you can always go online or check your statement to keep track of your expenses. This is also helpful to grown-ups when they write checks.
How to Get a Bank Account as a Kid
Since you’re still a minor, you need a parent or guardian to help you open a bank account. This type of account is known as a custodial account. It means that you and your parent have access to the money, but the adult manages the account until you are 18 years old. Once you are over 18, you can convert it into your own account.
Once you and your parents decide that you’re ready to have a bank account, you can open it online or in person. The bank will need some of your basic information, including your:
- Name
- Address
- Date of Birth
- Social Security Number
Bank Definitions
Having your own bank account is a big responsibility. As you prepare to open your first account, here are some terms that will help you manage your money and make good use of it.
Checking Account: An account that you can use for everyday expenses, like meals or transportation. These accounts don’t usually pay any interest, but they keep your money safe and make payments more convenient.
Savings Account: An account where you store your money while you save enough for a specific goal, like the down payment for a car. Savings accounts pay some interest and keep your cash safe.
Deposit: When you add money to your bank account.
Withdrawal: When you take money out of your bank account.
Bank Statement: A summary of how you used your bank account. This includes deposits, withdrawals, and expenses. Banks usually provide these every month and can send you a copy by mail or electronically.
Resources to Learn More About Banks
This article is just an introduction to the world of banking. If you’re curious and want to learn more, here are some ways to continue learning.
Remember we mentioned that there are laws and rules to make sure your money is safe at the bank? Well, the organization in charge of this also created The Learning Bank, a website where kids of all ages can learn more about our banking system and how it works.
The American Bankers Association also has its own website with tons of info you might enjoy. It includes interactive lessons for younger kids, career advice for teens, and much more. Check it out and take your financial education to the next level!
If you want to know how money actually works all around the world, the National Geographic Kids Everything Money book is a great resource to answer all your questions. It’s great for kids who are curious about the history of money and who love to learn fun facts.
Are you more into activity books? Take a look at the Kid’s Activity Book on Money and Finance. It’s a great way to get hands-on practice on money matters before opening your own bank account.
Want to learn how ATMs work? Start with the Fishboy Toy ATM, a great way to play pretend with real money and coins! You can use it as a piggy bank, calculator, or to practice your banking skills. That way, you’ll be a pro once you open your account.
If you already have a bank account, you’ll need to keep track of your money. The SMZ Log Books Ledger is your very own accounting book. Here, you’ll write down how much you spent and where. You’ll also keep a record of your deposits. This will help you monitor your money and have a clear idea of your expenses.
Money Made Easy
Bank accounts are the best way to keep your money safe. They also help you track your transactions and, depending on the type of account you have, they can even pay you interest! If you’re ready to open a bank account, talk to your parents and continue learning so you can manage your money responsibly.
