April is National Financial Literacy Month in the United States. In most cases, schools do not extensively teach financial skills. Teenagers, highly susceptible to messages from the media, often do not have guidance from teachers, who are not trained to teach financial skills, or from parents, many of whom do not model healthy financial behavior. This series of articles at Consumerism Commentary serves to help inspire discussion about basic financial concepts. Please feel free to forward this article to someone who might benefit from a basic financial overview.

This article covers the first type of bank account recommended for teenagers and others who are first becoming financially responsible. This is the first article in the Money Basics series.

What is a checking account?

A checking account is one of the most basic tools for establishing your financial identity. When I was a teenager, my parents took me to the bank to open my first checking account. I don’t remember the details, but I brought the money I had collected from my allowance and birthday gifts from relatives to the bank, and they gave me an account number and a book of checks. This checking account allowed me to keep my money safe as I saved money for large purchases. Every month, I received a statement describing all the money I brought to the bank, everything I took out of the account, and checks I wrote (if any). Banks won’t know about every check right away, so it’s important that you track this account yourself (see below).

The checks you write when you want to pay someone allow that person or business to take the money directly from your bank account. So if you want to use the allowance you have saved to buy a present for your brother, rather than going to the bank to take out the money you have deposited and carrying around bills and coins, you can write a check.

I mentioned the bank kept my money safe. Despite the popularity of bank robberies in the movies, it is unlikely for money to be stolen from a bank. It is more likely that cash left in my house would disappear, be misplaced, or be spent on things I didn’t need. The government helps out, too, by guaranteeing your checking account won’t lose your money.

What is a debit card?

Checking accounts have improved since I set up my first with my parents. Now, almost every bank will offer a debit card to go along with the checking account. This debit card lets you add cash to your bank account through an automated teller machine (ATM, or MAC machine). The card, which fits in your wallet and is usually made of plastic like a credit card, also allows you to withdraw cash from your account whenever you need cash. Some stores allow you to use your debit card to pay for the things you wish to buy instead of writing checks or exchanging cash.

Why do I need a checking account?

Any money you intend to spend soon should go into a checking account. When you open your first checking account, you may not have many bills to pay every month, like car insurance or rent. But you may want to buy birthday gifts for your friends and family, eat out with your friends, or in some cases, you may even need to help support your family. All of these will be easier with a checking account, checks, and a debit card.

If you have a job, find out about having your paycheck sent directly to your bank. This saves you the trip to the bank every week (or every other week) and allows you to receive the money in your bank account sooner. It also keeps your hands off the money so you don’t have the easier opportunity to get in your own way as you save.

How do I manage my checking account?

Banks will usually stop you from spending more money than you have in your bank account, but that is problematic when you write checks. If you write a check manually, your bank won’t know about it until the person or business who receives the check takes it to their own bank to deposit it or turn it into cash. So it’s very important to keep track of the checks you write so you always know how much money you have. If you mess up and try to spend money that you don’t have, your bank will charge you fees. These fees are completely unnecessary, so avoid them by keeping track of your money.

When you receive a check book, you usually receive a register — pages with grids. Within these grids, you should write down every transaction in your checking account. Each line includes a space for the date, a description of the transaction, and the amount. Your first line should be your opening deposit, the money you gave the bank to open your account. If you opened your account with $100 on April 19, 2009, your register would look like this:

If you decide to write a check on April 20 to buy a gift for a friend at Best Buy, your register might look like this:

As you can see, if you had $100 in your bank account at the end of April 19 and you wrote a check for $40 on April 20, your remaining balance is $60. Regardless of what your bank says, you only have $60 left to spend. At the end of the month, when you receive a statement from the bank, you can compare the bank’s records with your own, identifying which checks are still outstanding — not listed on the bank statement.

Keeping track of your checking account with this register was easy before debit cards and ATMs. But just as technology has made it easier to spend your money, technology has made it easier to track your money. I use Quicken on my computer because it works just like the register described above, but it automatically compares the bank’s records with mine.

How do I choose a checking account?

You should look for a checking account that does not charge you unnecessary fees. Most banks offer “student checking accounts” which have low minimum balances (if any) and no monthly fees. This is a good place to start. Student checking accounts are otherwise identical to regular checking accounts, and you can compare them by visiting a bank’s website or visiting a bank in person and asking questions. I suggest convenience, which can take several forms. You may want to choose the same bank that your parents use the most so you can combine trips to the bank when you have money to deposit. You could also choose a bank that has a branch location close to your house.

I suggest looking for an account that doesn’t allow you to “overdraw” your account. Overdrawing, which means taking more money from your account than you have available, can result in an overdraft fee. The bank will take your money from you as a penalty if you try to spend more than you have. Ask the bank about setting up your account to stop your debit card from working if you don’t have enough money. But the bank can’t do anything if you write a check and don’t have enough money in your account. If you write a check without enough to cover it, the check will bounce, and you will still be charged a fee.

Besides the regular or student checking account, you should know about two other types of checking account. Interest-bearing checking accounts allow you to increase your bank balance without doing anything. The bank pays you a small amount of interest every month in return for you giving them your cash. This sounds like a good deal, but it usually comes with certain restrictions. You may need to maintain a high balance in the account to earn this interest, the bank may charge you a fee, or a combination of the two. In most cases, savings accounts offer better deals than interest-bearing checking accounts.

The last type of checking account is gaining popularity. The paperless or electronic checking account, also called a bill payment account, eliminates the use of a checkbook. You will not write checks for these accounts, so you lose some flexibility to pay for a purchase if debit cards are not accepted. But you will be able to send checks to other people and businesses by visiting your bank’s website and entering the recipient’s appropriate information. The bank then sends a check electronically or through the mail and keeps a record of the payment online. I have an account like this at ING Direct.

This is the first article in the Money Basics series. Look for more from Consumerism Commentary about savings accounts, credit cards, debt, and interest.

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