Q: We need to start a bank account for our son, who is about to go to college. He is on a full scholarship, so he won't need money for tuition. Therefore, we want to find a savings account where he can earn some interest. What is your advice?
A: There are a few steps you can take to arrive at the right solution -- or solutions -- for your son's banking needs:
- Examine his banking needs in a little more detail. You say you are interested in a savings account, but under the circumstances he might need two accounts. One would be a checking account, to give him short-term access to spending money for things such as books and food. The other would be a savings vehicle, but with no near-term need for the money, you might want to consider a long-term CD so he can get a little better yield than most savings accounts offer.
- Minimize checking account fees. Most banks charge a monthly fee for checking, and this gets quite expensive over the course of the year. However, some banks still offer free checking. In particular, there are several banks that offer free checking accounts for college students. Also, online banks are good places to look for free checking. It's important to note that when banks advertise "free checking," they mean the account is free of a monthly maintenance fee. That doesn't mean there aren't other fees. In particular, overdraft fees can be very costly to inexperienced bank customers. You can avoid these fees by having your son opt out of overdraft protection. Not having the option of overdrafting the account will also help him learn good banking habits.
- Make sure the ATM network suits his needs. So that your son doesn't rack up ATM fees every time he accesses some cash, look for a bank that is part of an ATM network that covers both your hometown and the area where his college is.
- Compare CD rates and terms. As mentioned above, long-term CDs typically offer better yields than savings accounts, but you still need to shop around for the best CD rates to get the most from your money. You can check out the MoneyRates.com CD rates page for the latest information. If possible, choose a high-yield CD with a relatively low penalty for early withdrawal so you'll have some flexibility in case rates rise.
Whatever types of accounts and banks you choose, make sure you take the time to review with your son some of the basics of responsible banking. Along with what he learns in college, knowing how to read a bank statement, keep accurate records and avoid overdrafts are all lessons that could help him throughout life.
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