CHAPTER TWO: FINANCE
"Climb on in," Luis said to Jeffrey as he pulled up in front of the local grocery where Jeffrey recently had begun working. Luis had a part-time job this summer, too. He was a cashier, shelf stocker and balloon filler at a discount party store. Both Luis and Jeffrey had gotten their first couple of paychecks and were experiencing a new sense of independence in managing their own finances.
As they headed toward the beach to do some in-line skating, Jeffrey spotted a bank on the corner. "Hey, I'm thinking about opening an account at that bank," he said. "My mom is cashing my checks for me right now, but I really want my own account."
"I opened one at the credit union across the street last week," responded Luis. "You've only got to have a minimum of five dollars in a savings account, and checking is free."
"Yeah, but I don't want a savings account. This job is just to give me spending money. I don't need a savings account for that," said Jeffrey.
"But it's not that hard," Luis said. "My first check was for $123.79. I put $100 in savings and took the rest out for spending money. Next time I'm going to put some in my checking account, too, in case I want to use my debit card."
When you think about financial independence, one of the things that comes to mind is having a way to keep your money safe, but still be able to access it. Having a special stash of cash under the T-shirts in the back of your top drawer or in a jar under your bed is one approach, but banking offers a way to manage your day-to-day finances and provide safety, too. While both Luis and Jeff have very different ideas about saving money and what they want from a bank, both realize that having a bank account can help them gain financial independence.
Should you use a bank?
What does a bank account offer you over a less formal approach to managing your money? For one thing, many bank accounts pay interest on the money you have deposited with them, and that's always a plus. Another thing to consider is the out-of-sight out-of-mind factor that makes a bank account _ especially a savings account _ a distinct advantage over the in-your-bedroom savings plan. Cash stashed in your bedroom is much more tempting to spend than cash you've deposited in the bank. What you don't have easy access to, you won't spend. Simply having a bank account as a place to keep your money may help you hang onto it a little more easily.
The big challenge in banking for young people is that bank accounts can be hard to get or very expensive to maintain. Banks are businesses, and they charge fees for the services they provide such as savings accounts, checking accounts and debit cards. There are ways that you can avoid paying service charges for your bank account, so be sure to ask how it is done. Sometimes customers can reduce bank fees by keeping a minimum balance in their account, but without planning, having enough money for a minimum balance can be hard to do.
Also, many banks restrict the kinds of accounts students under the age of 18 may open. If you're under 18, having your own bank account may mean opening a joint account with an adult who already has an account at that bank.
Two of the main banking choices are commercial banks and credit unions. Commercial banks offer checking accounts, savings accounts, investment services and loans to people and businesses. Some of the advantages of commercial banks are that they often offer many convenient locations, usually offer ATM and debit cards, provide a wide range of services including different kinds of checking accounts, savings accounts and loans, and their deposits are insured by Federal Deposit Insurance Corp.
Some things to consider when opening a personal account at a commercial bank are:
Fees for checking and savings accounts can be high
Sometimes personal service is minimal in large institutions
Students under 18 cannot open an account without making it joint with an adult.
Credit unions are non-profit financial institutions that provide banking services for their members. Some of the advantages of having accounts at credit unions are that they offer low fees for banking and low lending rates for their members. Because they are usually small, credit unions often provide personal service to their members. In addition, they often pay dividends on savings and checking accounts without requiring members to have a large amount deposited.
Some things to consider before opening a credit union account are:
It may not be conveniently located
Students under 18 cannot open an account without making it joint with an adult
Because they are smaller than many commercial banks, the products credit unions offer may be limited. It is also important to make sure that deposits are insured by the Federal Deposit Insurance Corp.
New clothes, music, a car _ these are all things students want and maybe even need. But if you spend without a plan, then all your money can disappear before you even realize it. Every time you spend money, you're deciding not to save it. What you spend today determines how much you have tomorrow.
The things you buy with your money are assets _ items of value. Some assets lose their value as soon as you purchase them, such as a candy bar or a soda. Some purchases are assets that will keep their value for a little longer, such as new clothes that you will wear for a while or a stereo system you'll keep for a couple of years.
But all of these purchases are consumable items, meaning they lose their value over time. Having money in savings is an asset, too, but because you earn interest on your savings account, the money you put in savings is an asset that will gain value over time instead of losing value. An important part of building financial independence is learning to put some of your money into assets that will grow in value rather than letting all of your money disappear into consumable goods.
Short-term saving is saving for something you want to purchase within a year, such as enough money for a down payment on a car or enough money for car insurance for a year. Long-term saving is saving for something bigger or further in the future, such as money for continuing your education or money to take a special trip. Both kinds of saving require planning and goal setting. Both kinds of saving require making a commitment to the future.
What kinds of things do you want to save for? Saving money can be easier if you have a goal in mind. Take some time to brainstorm about things you would like to save for and write down your ideas. Then answer these questions:
What is the top thing on the list?
How much money will you need to make this purchase?
Outline a savings plan to see how long it will take you to save for this item.
One certain way to make sure you save is to make saving your most important expense. If saving is something you do only if you have some extra money left over, then you probably won't save very much. If you treat saving as something you must take care of, just like any other bill or financial obligation, they you will have greater success saving money.
Exactly what is a check? A check tells your bank how much to take out of your account and give to someone. When you write a check for a specific amount and sign the bottom, you are giving the bank a written order to take that amount of money out of your account and give it to the person or company you are writing the check to.
When you open a checking account, you will get printed checks with your name, address and (sometimes) your telephone number printed on the checks. You will also get printed deposit slips for depositing money into your account. Writing a check is a convenient way to make a purchase because you don't have to have the exact amount of money with you. Because banks keep a record of all the activity on your bank account, writing a check gives you an automatic receipt for any payment you make.
Checking account dangers
When you write someone a check, he or she trusts that you have enough money in your account to pay the check. Your bank trusts that you will not write a check for more than the amount you have in your checking account. If you write a check when there isn't enough money in your account, then you will "bounce" your check. Bouncing a check means the bank will return it ("bounce" it back) to the person or company you gave it to and tell them your account had insufficient funds, meaning that there was not enough money in your account.
Bouncing a check is a big deal. It is against the law, and if it is done repeatedly or on purpose, it will be prosecuted. Even when it happens by accident, it will cost you A LOT of money. If you bounce a check, both your bank and the company you wrote the check to will charge you a fee. This fee can be as much as $30 each _ meaning one bounced check could cost you $60! Remember: Even when you go just one penny over the amount you have in your account, that check will bounce! You have to keep very careful records of all the deposits you make and all the checks you write to make sure this does not happen.
A debit card looks like a charge card _ sometimes it even has a MasterCard or Visa logo on it. But even when a debit card has a major credit card symbol on it, it is a lot different from a credit card. When you use a debit card, you have given the bank permission to take that amount of money out of your account to pay someone for goods or services. In that way, it is just like writing a check; you have to have enough money in your account to cover the amount of your purchase. Many banks offer debit cards at no charge with a checking account. Debit cards are a convenient way to make purchases because they are easy to carry with you.
Beware, though! Because they are so easy to use, debit cards can get you into trouble if you are not keeping track of how much you are spending. If you use a debit card, you have to save every receipt and record it in your checking account register promptly.
What do you think?
Jeff and Luis had very different ideas about bank accounts and saving money. What do you think money means to each of them? Who do you think you're more like: Luis who is putting money into savings, or Jeff who is using his paycheck for spending money?
Sharon Hodges and Barry Friedman are authors of Financial Freedom, a booklet on personal finance available free through the Florida Council on Economic Education.
SPECIAL TIPS FOR NEW CHECKING ACCOUNT OWNERS
Keep your records up to date _ Every time you write a check, or make an ATM withdrawal, or use your debit card, or make a deposit, write your transaction down in your check register and save your receipt. EVERY TIME! It is helpful to create an envelope for each month, so that you always put your receipts in the same place. You can use a regular letter envelope for this and put all your receipts and your bank statement into it.
Think about keeping your bank records on a personal computer. Many new computers come with software such as Quicken or Microsoft Money that lets you keep your bank records on the computer. This software is pretty easy to learn, and once you know how to use it, it saves you time and keeps you from making addition and subtraction mistakes because the computer does all the adding and subtracting.
Balance your account _ Each month the bank will send you a statement that says what you have spent and what you have deposited. Checking your own records against the bank statement is called balancing your account. You should balance your account every month as soon as your statement arrives.
Duplicate checks _ For new checking account owners, using duplicate checks is a great idea. These are checks that make a carbon copy each time you write a check. If you forget to write down the check number or the amount of a check when you write it, you have an automatic record of all the checks that you have written.
WHAT YOU NEED TO OPEN A BANK ACCOUNT
Money _ For most accounts there are minimum first deposits and minimum account balances. Opening an account requires planning because you must know how much money you need at the bank you have chosen to get your account started.
Identification _ Banks will require you to show identification to open your account. A driver's license or passport is good because it has your photo and shows your current address. Sometimes official correspondence, such as communication from your school, can be used for identification.
Social Security number _ You will need to have your Social Security number to open an account.
Account signature card _ The bank will ask you to sign one of these so that there is an official copy of your handwriting on file for writing checks and withdrawing money.
A willing adult _ The big banking restriction for students under 18 years of age (and this is a big one) is that most financial institutions will require your account to be joint with an adult who has an account at the bank. Banks are sometimes reluctant to open checking accounts for teenagers because of the big financial responsibility that comes with managing a checking account. Even on savings accounts, minors are often required to have their account tied to an adult customer's account.
About the Florida Council on Economic Education
Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the Council's programs for teachers and students, please call (813) 289-8489.
Newspaper in Education
The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or (800) 333-7505, ext. 8969.
Welcome back to the St. Petersburg Times' Newspaper in Education page. This year's series is about something we all love and wish we had more of: money. Throughout the school year in this space you will find fun and informational stories about how to earn, keep and save money. Developed by the Florida Council on Economic Education, the series will explore such topics as personal finance, business etiquette and ethics, making decisions, managing your time and money and more, all geared toward you, not just your parents! We hope you enjoy this economic adventure.