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Banking Basics for Beginners

October 13, 2021

 

Banking Basics for Beginners

Money can be obtained from and put into a bank. But that knowledge alone does not equip an individual to adequately handle the financial tasks required in the real world. Since money makes the world go round, parents must educate their offspring about banking basics to adequately prepare them for adulthood.

The best place to begin banking education is at the beginning. An understanding of what a bank is and what it does is the first order of business. A bank is more than an impressive looking building. It is an institution that receives money from and stores money for customers; in addition, it offers loans to individuals and businesses. Banks make money by charging a higher interest on loans than what they pay their customers for their deposits.

Why would people want to put their money in a bank? Two good reasons exist. First, placing money in a bank ensures the funds are safe. Unlike money at home in a piggy bank or under a mattress, it cannot be lost, stolen, or burned. Money is even protected should the bank go under because bank accounts are insured by the Federal Deposit Insurance Corporation ("FDIC").

A second reason placing money in a bank is attractive is that a customer earns money for the bank's use of it. The money earned is called interest, and it is paid periodically, such as monthly.

A customer makes a deposit when they place money with the bank for safekeeping. The bank holds these funds on the customer's behalf. When the customer takes money out of the bank, they are said to withdraw funds.

A bank customer is assigned an account with the bank so their funds may be identified. Each account bears a unique set of digits to connect it to the customer. They can keep up with the amount of funds available in their account, called the balance, by maintaining a register, a small book in which transactions, both deposits and withdrawals, can be listed. Having an accurate balance is key to avoid being overdrawn, meaning the customer has spent more money than is available in their account.

Checking accounts and savings accounts are the two basic types of bank accounts. A checking account is used when funds need to be available to the customer on an ongoing basis. The funds may be accessed by writing a check, setting up an automatic payment, using an automatic teller machine ("ATM") to withdraw money, or utilizing a debit card to make a payment.

In contrast, a savings account is set up for funds the customer does not need immediately. As the name suggests, the account holder may be attempting to amass funds for a particular purpose such as a vacation, a major purchase, or higher education.

The bank sends customers a record of their account transactions, called a bank statement, on a regular basis, typically monthly. The statement details the deposits and withdrawals from the account which occurred during the time period covered. Upon receipt, customers should undertake balancing, a method of reviewing their register of spending against the bank statement to verify the records match.

Withdrawals from a checking account may occur via check. A check is a written, dated, and signed paper which directs the bank to pay a stated amount to an identified payee, the person to whom the money is to be paid. The account holder's name and address is listed in a check's top left hand corner, while his account number is located at the bottom of the check.

Handling money can be challenging. The task is even more difficult when a basic understanding of how banking operates is lacking. Taking the time to educate teens about the fundamentals of banking procedures and common terms used in that context will give them a leg up in tackling financial issues as an adult.

Continued Learning

For more personal finance education and tips, check out the rest of our blog posts at  https://www.sunmarkbank.com/blog.