If you follow the right steps, opening a bank account is always going to be safer than keeping stacks of cash under the dresser. The sooner you start your journey towards financial literacy, the better. Before you open any account, make sure it is FDIC insured, which means that the bank will insure your money up to $250,000 — even if the bank closes. Let’s start by going over some of the common accounts one can open.
Savings: Before age 14, try to open a savings account. A savings account is a bank account that earns interest over time, but there are strict limits on how many withdrawals you are allowed to make.
Checking: A checking account is an account that is linked to one’s debit card, and it allows you to deposit and withdraw money. Unlike a savings account, most checking accounts do not earn interest so it’s wise to not keep all your money in your checking. Make sure to look for a student account with a low minimum balance and no fees. Be sure your account does not have overdraft. Overdrawing is the act of withdrawing or spending more money than is in your bank account. This will lead to large fees that can quickly leave you in a financial hole if you aren’t careful. It is always your right to opt out of overdraft so that your financial institution will just decline the debit card transaction if you are short on funds so you don’t overdraw your account.
Certificate of Deposit (CD): A certificate of deposit, or CD, is a savings certificate that has a fixed maturation or end date. If you access these funds before the CD fully matures you have to pay a penalty of some of the interest you have earned. The idea behind a CD is you sacrifice the option to immediately cash it in, but you get a higher return or higher interest rate. Another thing to keep in mind is that, according to Toiria Baker of the Economic Awareness Council of Chicago, once the CD matures, you usually have a 7 day grace period to either renew it at a new rate or claim it.
Credit: According to Lanette of TCF Bank, you may want to eventually get a credit card to build your credit when you are a young adult, but you should keep your credit utilization at less than 30% of your total credit limit and pay off your balance in full every month. Make sure to pay off the full balance, NOT the minimum balance, or you will incur more debt and interest charges very quickly.
It’s never too soon to start your journey towards responsible finance management. Start saving birthday money, graduation gifts, get a job, and save your paychecks. If you save diligently, invest wisely, and spend minimally, you’ll be setup for a lifetime of financial security.