For Parents

How to Explain Banking to Kids

You will learn how to teach your kids what a bank is, what it does, why it is important for money management, and basic banking language and terms!

girl-looking-at-banking-app

If you haven’t had “the talk” with your child yet, you’re probably thinking it’s time to start teaching them about banking. But you’re probably also unsure about how to approach the subject. As parents, we’ve all been there. Maybe your little one is curious about how your debit card works. Or your child is now a teen and you still haven’t crossed banking off their Life Skills checklist.

No matter how old your kids are, it’s not too late to break down banking and kick start their financial education. And we’ll show you just how – even if you’re not a financial expert. So kick back, relax, and take notes.

How to Explain How Banks Work

You’ve probably heard people say that if your child is old enough to ask, they are old enough to know. This message rings true for a lot of topics parents have to tackle, including finances.

How to Explain Why Banks Are Good

By explaining the essentials of banking in the simplest possible terms, kids of all ages can get a basic understanding of financial transactions. The idea here is to start, no matter where you as a parent might be on your own financial journey.

To make it easier, we’ve anticipated some of the questions that your child may have and created some answers that you can use to get the conversation started.

What Is a Bank?

Teaching our kids how banks work only requires general knowledge on the topic. Not to worry, you don’t have to be an expert! If you have a bank account and use it for your everyday transactions, you can teach your child what a bank is. Here’s how.

A bank is a financial institution that holds and lends money. It holds the customer’s money in a checking or savings account. And it lends money in the form of home loans, car loans, or credit cards.

How Does a Bank Work?

The bank takes each deposit that you make and lends that money to other people. Of course, this might make your child suspicious right away. It’s OK! This is an opportunity for you to reassure your child that banking is 100% secure, as long as you use an FDIC-insured institution.

If you’ve got a curious kid on your hands, they may want to learn more about what FDIC insurance means. Here’s an official FDIC video for you to watch together and learn more.

What Is Interest?

If your child is a little older, they may have heard the word “interest” associated with banks and they might want to know what that means. As a thank you for depositing money, the bank may pay you a small fee in interest. The more you keep in your account, the more the bank will use your money and the more interest they could pay you. The interest that you receive may vary depending on your bank and type of account.

What’s the Difference Between a Checking and Savings Account?

A checking account is used for everyday transactions like writing checks, paying bills, and paying rent. When you write a check or pay with a debit card, the money comes out of your checking account.

A savings account helps you set money aside for the future. This includes saving to buy a special toy, for college, for an emergency.

How to Explain the Benefits of Having a Bank Account

Sure, your child might prefer to stash their cash in a piggy bank. And that’s great! But having an account at the bank offers major perks and your little one can have both.

These are some of the benefits of bank accounts that you can discuss with your child, depending on their age:

  • Safety – Imagine your child saving up all their birthday money, only to lose their wallet at the movies. Having their money in a bank account will avoid these disasters, which can often happen at this distracted age.
  • Paychecks/Direct Deposit – If your teen has a part-time job, they probably receive a paycheck. Whether they get a paper check or direct deposit, they’ll need an account to keep their money safe until they’re ready to use it.
  • Goal Setting – If your child wants to do something specific with their money, the bank is the best place to keep cash out of sight and out of mind. This can help them avoid the temptation to spend while safeguarding their money.

How to Get Your Kids Started With Their Own Bank Account

The best way to get your child started is to simply open a bank account. For most kids, this is an exciting step that makes them feel grown up. So go ahead and make a day out of getting your child their first bank account! We promise, you’ll always remember the look on their face when they receive their first checkbook (with cool designs, of course!) or see their own name embossed on an ATM card.

While you’re at the bank, give them a quick rundown of how to use the ATM machine with their new card and PIN and how to make empowered selections at the machine.

When setting up a minor account, one of the individuals signing up for the account must be over the age of 18.

The following are some of the documents that your bank may require to open an account, whether you choose to do it online or at a branch:

  • Adult’s US ID (driver’s license, passport)
  • Adult’s Social Security number
  • Adult’s current bank account number (Parents Account will be connected to Child’s account)
  • Child’s US ID (social security card, birth certificate, school ID, passport)

Depending on your bank, you may also need to make an initial deposit. In most cases, banks ask for $0 to $25 to open a new account.

How to Set a Good Example

With kids, it’s often monkey see, monkey do! Whether you’re a spender or a saver, your child will follow your lead. And now that your little one has their own bank account, it’s more important than ever to model good financial behavior. By being mindful and keeping the communication channels open, you can help your child manage their bank account.

Here are some ideas to set them up for success:

  • Match their savings. If your child works hard to achieve a goal, match every dollar that they put towards that goal.
  • Help them find a job or a side hustle. Many kids may not realize how much hard work it takes to earn a living until they have their first work experience.
  • Avoid impulse shopping. When you take the time to research your purchases and ask yourself if this is a need or a want, you stay on budget and can often find lower prices.
  • Prep for college. Talk to them early about how much you can contribute to their tuition and other ways to finance their college education.
  • Give back. Talk to them about which charities you contribute to and why. Offer to help the charities that are important to them and suggest other ways to help in addition to donating cash.

Banking Definitions

Before you speak with your little ones, familiarize yourself with some of these common banking terms. This will help you feel more confident and provide them with accurate info.

First up, a checking account is a deposit account held at a financial institution that allows you to make withdrawals and deposits.

A savings account is a deposit account held at a bank or other financial institution. Depending on the type of account that you have, your savings might accrue interest.

A fee is a fixed price charged for a specific service. Sometimes banks charge checking fees or statement fees every single month. Other banks waive those fees if you keep a certain minimum balance or if you get your paycheck deposited directly into your account.

A withdrawal involves removing funds from a checking or savings account.

When you deposit, it’s quite the opposite. A deposit is money that you put into your account, whether it’s cash, a check, or funds that you transfer from another account.

An FDIC-insured account is a bank account at an institution where deposits are federally protected against bank failure or theft. The FDIC is a deposit insurance agency backed by the US government.

Banking Resources

Playing is one of the best ways for kids to learn new skills. If you want your child to learn about banking, try the ATM Savings Piggy Bank Machine. You can use it with real cash, for your kids to save their money while they also practice using an ATM card.

If your child’s an avid reader, check out Dollars & Sense: A Kid’s Guide to Using–Not Losing–Money. This book is a great resource for middle schoolers to get a better idea of how money works and how to use it properly.

With the Kid’s Activity Book on Money and Finance, you can teach your child how to save money, borrow it, and plan for the future. It’s got more than 40 quizzes, puzzles, and games to keep kids entertained without even realizing they’re learning. Perfect for road trips or rainy afternoons at home.

Celebrating Their First Steps

At the end of the day, banking is an essential skill for today’s modern society. The sooner your child gets familiar with it, the better.

Remember, it’s never too early to lay the foundation for your child’s financial future, all while teaching them that their dreams are within reach: whether that’s buying that super-expensive Lego set, or indulging in another limited-edition Squishmallows drop!

Related Reading For You and Your Kids

About the Author

Lucia Caldera

Lucia Caldera is a writer who specializes in personal finance. Her goal is to create approachable content that sparks financial wellness and unlocks personal growth. Lucia's work reflects her passion for financial education as the key to reducing the wealth gap for future generations.

Last updated on: July 6, 2022