“How do you get money from the bank, Mom?”
Little Bit and I were headed to get haircuts, and since our hairdresser doesn’t take cards, we had to hit the ATM first.
In went the card. I entered the PIN. Eighty dollars came out of the machine, more money than Little Bit gets for her allowance in 3 months. To a seven-year-old, it must have seemed like magic. Magic she could use maybe to get more money to get cooler stuff.
My daughter asked an innocent question, the kind that second graders ask regularly. It’s an easy one to answer, right? You get money from the bank either because:
- You’ve already given the bank money, and they are just giving it back to you; OR
- Because the bank is lending you money that you have to pay back, along with some extra money called interest.
It’s not exactly rocket science, but it’s one of the foundations of financial literacy.There’s no magical way to get money out of the bank without putting it in. You have to put money in the bank in order to get money from the bank. Maybe you put it in first, or maybe you put it in later. Either way, you’re still putting money in the bank if you want to take it out.
Unless you work for the bank, there’s no other legal way to get money from it.
When it comes to personal finances lessons you need your kids to learn, this is a biggie. It took me until I was well into my 20s to learn it, and I spent years paying off credit card debt because I didn’t grasp this simple fact before I went off on my own.
So in light of that, here’s the story you can share with a kid in your life (or anyone else who needs to learn it.) I’ve changed the names but otherwise, it’s a pretty accurate account of how I answered the question.
How Do You Get Money From the Bank, Mom?
“Come on, Emma, get in the car. It’s time to go,” Emma’s mom called.
“Where are we going, Mom?” Emma answered.
“It’s haircut time!” Mom answered. Emma smiled because she liked getting her hair cut. Miss Annie always made her look pretty and she got to watch her favorite DVDs while she waited.
But first,” Mom said, “we have to run to the bank so we can pay Miss Annie.”
Emma waited as her mom pulled up to the bank and fumbled around in her purse for something. Then her mom pushed some buttons on the machine, and out came some money.
It seemed like a lot of money. Money that could pay for a haircut, or pizza, or maybe even a new bike.
“I could really use a new bike,” Emma thought. “My old one is pink, and I don’t like pink anymore. I want a green bike. I don’t have enough money for one, though. New bikes are expensive. Maybe I can get money for it from the bank!”
“Mom,” she asked. “how do you get money from the bank?”
The First Answer
Mom was quiet for a minute.
“Mom!” Sometimes Emma’s mom didn’t pay attention. “How do you get money…”
“I heard you, Emma. I’m just figuring out how to explain it,” Mom said.
Emma didn’t like that. It sounded like one of those complicated grown up things, like why she couldn’t have a big sister.
“You get money from the bank by putting money in the bank first,” her mom said finally.
“You have to put it in first?” Emma asked.
“Yes. You have to put it in first,” Her mom sounded very definite. “It can be money you get from working in a job or money someone gives you as a present or money from someone buying something from you, but you have to have the money first and put it in the bank. Then you can get it out later.”‘
Emma remembered going to the bank with her coin jar and birthday money with her dad. “I put money in the bank! A hundred and sixty-seven dollars and 29 cents.”
‘Yes, you did,” her mom answered. “You have a savings account, and we put money in there to save for you when you get older.”
Emma’s face fell. “For later? Not now?”
Her mom laughed. “Not now. When you get older, you’ll probably want to go to college. That will be expensive, so we put money aside now to help pay for it later.”
“It will cost a hundred and sixty-seven dollars?” A hundred and sixty-seven dollars seemed like a lot of money to Emma. Enough to buy a green bike, anyway.
“It will probably cost a lot more than a hundred and sixty-seven dollars,” her mom said, “unless you win a really big scholarship. College costs thousands of dollars a year.”
“Thousands of dollars? What if you can’t pay for it all?”
The Second Answer
Emma’s mom nodded. “Dad and I are saving money for your college, too, so we hope you’ll be able to pay for it when the time comes. A lot of people can’t. So they have to borrow money from the bank to pay for college and then pay the bank back.”
Borrowing sounded okay. “Can I borrow money?” Emma asked.
“No,” laughed her mom. “You aren’t old enough. Besides, if you borrow money, you have to pay the bank back. And you have to pay them extra money, called interest. It can take a lot of time to pay for something if you borrow money, and you have less to spend until you pay all the money back. Most of the time, it’s better to save money for what you want instead of borrow for it.”
“But sometimes….” Emma prompted.
“Sometimes people borrow. For instance, your dad and I borrowed some of the money to buy the house we live in. Most people have to do that, because houses cost so much money. And every month, we pay the bank back some of that money. Every month we owe the bank a little less. ”
“But if we stopped paying the bank,” her mom added, “then we couldn’t keep our house. The bank would take it.”
“The whole house?”
“The whole house. So we always pay the bank first, and then we pay for things we need like food and electricity before we spend any money on fun stuff.”
“So, you shouldn’t borrow money for bicycles?”
“Banks are a business, Emma. They make money by getting people to borrow and pay interest, and that allows people to buy cars and houses and college educations. So we borrow for the big things because it makes more sense to buy them and pay over time, even if it means we have to pay extra because we didn’t save the full amount before we bought. But…we try not to do that when we don’t have.”
When you borrow, you make a promise. You promise you’ll pay back the money, plus the interest.”
Emma nodded, “And it’s important to keep your promises.”
Emma’s mom smiled. “Right. Only make promises you can keep. That means we don’t borrow for bicycles and other things we can save for, and we make sure the bank gets paid what we owe them each month. Now, let’s go get our hair cut.”
A Word or Two After
So that’s the simple answer, kids. You get money from a bank by putting money in, either before you need it or after. It’s better to get money by depositing than borrowing because you will have to pay eventually. Better to pay up front and enjoy than pay more and longer.
As Little Bit gets older, I’ll start covering credit cards, which probably seem just as magical to her as the ATM did. I’ll emphasize again that when you charge something, you’re making a promise to pay the money back. I’ll talk about credit scores, and all of the problems that having a bad one creates. She’ll see a credit card repayment calculator, and we’ll play with the numbers so she can see how long it can take to pay for a bunch of impulse purchases.
I’m not an “All Debt is Bad Debt” kind of blogger. Debt is a tool, but I like to think of it as a chainsaw. Used carefully, it’s useful, but it can do a lot of irreparable damage if you don’t treat it with the caution it deserves.
Make sure you’re talking to your kids about money. Don’t let them think that cash machines are magic. Your kids need to know how to get money from the bank and that they will always have to pay for it one way or another.
What interesting questions have you gotten about personal finance from kids? How would you have explained banking and debt to a second grader?
*Part of Financially Savvy Saturdays on brokeGIRLrich.*