Last month, the Reserve Bank of India, or RBI, passed a directive allowing minors above the age of 10 to open and operate a savings bank account independently. While minors currently can have their own accounts, they have to mandatorily have their mothers as guardians.
The question is whether or not you should go ahead and open an account for your child? First and foremost, you need to be convinced that your child should open such an account. The prime reason the central bank has introduced this move is to bring about financial inclusion and financial literacy. Take advantage of it. This is the age your child will have a comparatively easier time parting with tangible money than when s/he is a teenager.
1) Do your homework first
The RBI has given banks the liberty to decide on the minimum documentation required for such accounts. The individual banks also have the discretion on what facilities to extend to such account holders in the form of internet banking, a debit card and a cheque book. The bank can also decide the amount up to which minors may be allowed to operate the account independently.
Look at the minimum balance required, the service charges, the limit on withdrawals, the limit per transaction, and the per day limit on the debit/ATM card. Check whether you can customise these limits.
2) Include your child
When you are comfortable with the account that the bank has to offer and the safeguards on the various facilities as mentioned above, take your child to the bank. Explain the details to your child, and let her/him interact with the bank representative and be involved in all the paperwork. Tell your child to feel free to ask questions if confused about anything.
3) Explain the importance of saving
You are aware that you are promoting a saving habit in your child. But you will have to explain to him/her the logic behind this.
Ask your child to set a goal – either a purchase like a bicycle or a long-term goal such as higher education. Explain how putting aside a little money every month can grow into a certain amount in the future to meet his set needs. You can also draw out a savings plan on an excel sheet to indicate how much needs to be saved each month to achieve the goal.
4) Explain how the savings will be done
You will have to elucidate the concept of banking to your child. The child needs to realise that money does not “automatically” come into a bank account. So encourage your child to put a certain portion of his allowance into the account. Similarly, monetary gifts for birthdays and festivals can be deposited here. If you are one who does not mind offering a “payment” from doing odd jobs on a regular basis – such as keeping the room tidy or helping set the table - that money too can find its way here.
To motivate your child, you could reward him/her by matching a percentage of his deposits.
5) Keep a tab
While letting your minor operate his/her own account is a smart way to get your child to be financially savvy, keep a check on this newfound independence. Simply opening an account and depositing a lumpsum is not the solution.
Once you have opened an account, ensure that all documents relating to that bank account and statements are kept in a folder. As and when they come, sit and discuss the periodic bank statements with your child. Discuss the balance, interest earned and recent transactions. You too should monitor the frequency of withdrawals and where the money is being spent. Discuss the choices made and offer guidance.
In conclusion, should you decide that it is not the right age for your child to open an account, do make an effort to include him/her in all your banking activities. Let your child accompany you to the bank while you conduct your transactions either via a cheque or an ATM. Explain how the process works. You can also teach the child about saving for a goal. Whether a brick and mortar bank or a piggy bank, inculcate the savings habit now.