Introducing your kid to finance early helps set them up for lifelong success. Which, honestly, is a lot harder than it sounds. It’s fine if you feel flustered or uncertain about how to approach the topic. One of the best things you can do is to pick an account type and explain it in as much detail as reasonable. Chances are, along the way, you’ll explain the basics of banking. With that in mind, one of the best accounts for lifelong success is Money Market Accounts. Today, you’ll learn everything needed to foster your little one’s curiosity about MMAs.
How to Explain What a Money Market Account Is and How They Work
Start simple and explain what a savings account is. When explaining interest, use easy-to-understand examples like “You deposit a dollar, and after X amount of time, the dollar is worth 1.05”. Next, explain the limitations of a savings account. Mention that you don’t get a debit card with a savings account and that online transfers are restricted. From there, explain that an MMA is a sort of blend between a checking and savings account but typically offers higher interest than base savings.
Revisit the initial interest example with phrases like “So, remember how if you leave a dollar in a savings account, it becomes 1.05? Well, if you leave a dollar with an MMA, it becomes 1.25.”
It’s important to get your kid excited about savings! If you’re having trouble getting them to focus on the idea of a money market account, then there are other ways to hook them. We recommend asking them if they want to be rich when they get older. Chances are they do. Let them talk about everything they’d buy if they had a million bucks. And once they’re done, mention that an MMA is a resource that helps people grow their wealth.
And, if you’re kid isn’t really interested in being rich, then explain that they’ll still need money to live the life they want. Introduce MMAs as a path towards that life.
How to Explain the Pros and Cons of a Money Market Account
Money Market Accounts have pretty clear-cut pros and cons. Explaining them to your kid helps solidify their understanding of MMAs while teaching them how to weigh the financial benefits of any bank product. Here are the most important pros and cons to tell your kids about.
Pros
Here are the benefits of an MMA.
Higher Yield
Money market accounts offer really competitive interest yields, which is an easy and passive way to grow wealth. Let your kid know that the best thing they can do is make their money work for them. Plus, money market accounts are much less risky than investing or trading.
Insured
Money Market Accounts are insured by their financial institutions for up to 250k. Chances are your kid doesn’t have that much in savings. But it helps to introduce them to the idea of having their money protected. Having large amounts of cash is dangerous. It could get lost, damaged, etc. But letting them know there’s an easy way to prevent those hassles by depositing is a step in the right direction.
Flexibility
One of the most significant drawbacks to a traditional savings account or a CD is that the money is locked in them for X amount of time. MMAs, although restricted in some aspects, still allow you to make charges, transfers, or withdrawals with little to no penalty. That means if your kid is saving up for something but changes their mind part way through, they can still access their money.
Bank Specific Perks
Many financial institutions offer certain perks for an MMA. Your kid may automatically enroll in a small monthly lottery, receive special treatment, or other fun perks. Make sure to ask about it during account opening.
Compound Interest
Compound interest isn’t exclusive to MMAs, but they truly are a big benefit. An easy way to explain compound interest to your kid is by revisiting the interest yield phrases we mentioned earlier. Say things like, “If you put a 1.00 in a money market account, that dollar is worth 1.25. But now that 0.25c earns interest too.” It’s a bit of an oversimplification, but it’ll help introduce them to the idea.
Cons
Here are the cons of having a money market account.
Minimum Balance Requirements
Minimum balance requirements are typically $1,000, which is a solid chunk of money for a kid. Dropping below the minimum balance comes with fees. And if it’s done too frequently, the MMA may be converted into a lower-yield account.
Withdrawal Penalties
Money market accounts definitely have more flexibility than traditional savings accounts. But they still have additional fees if money is withdrawn too frequently or if a debit card is used too much.
Balance Related Interest Yields
Many MMAs offer high-interest yields only when the balance exceeds a set requirement. For example, a thousand dollars may be the account minimum. But five thousand dollars may be the minimum to gain the highest interest possible. This is an example. Check your MMA for the exact balance requirements. While this can be a pro or a con, we’ll file it under con as not every kid has money to meet the interest yield.
How to Get Your Kids Started with a Money Market Account
There are two ways to get your kid started with an MMA. You can open one online or take it to your local branch. We recommend doing it in person. Licensed bankers can explain the ins and outs of an MMA better than most people. Plus, it’s a smoother process than uploading your information online at the mercy of your internet connection. You or another adult will need to be on the account with them. Ask, specifically, about the following;
- Account Minimums
- Tiered Interest Rates
- Monthly Fees
- Withdrawal Restrictions
Next, download your financial institution’s online app. You and your kid can make a game of monitoring interest gains. You can also download a budgeting app, port your info over, and create a long-term budget for your kid to live by.
Money Market Account Definitions and How to Explain Each One to Kids
Minimum Balance
To explain the minimum balance, use phrases like; “the least amount of money you can have in the account.” or “The minimum balance is the cost to keep the account open.” Let them know that minimum balances aren’t exclusive to MMAs.
Annual Percentage Yield
The annual percentage yield, also known as APY, is the interest an account gains. To explain that, start with the phrase we mentioned above. “If you put 1.00 in an account and it becomes 1.05.” Follow that with a phrase like, “But how much that dollar becomes depends on the APY. The higher the APY, the more the dollar is worth.”
Tiered Interest
Tiered interest is when the APY changes based on the balance. To explain it, use the APY phrases combined with, “Tiered interest is when the APY gets higher as your balance reaches set milestones. A 1.00 might become a 1.05 when your balance is low. But when your balance reaches a certain amount, a 1.00 becomes 1.10.”
Terms
Some money markets may have term requirements. Explaining that is best done with phrases like, “You have to leave X amount of money in the account for X amount of time.”
Videos and Other Resources for Kids to Learn About Money Market Accounts
Here are a few resources you can use to explain money market accounts.
Check Practical Personal Finance’s video on MMAs. It’s not tailored to kids, but it does a great job of explaining the ins and outs in an easy-to-understand manner.
Written by Cinders McLeod, Save it! Covers the importance and basics of savings. It’s the perfect tool to get your kid excited about making their money work for them.
GoodBudget is a savings app that lets you create a detailed budget. Work with your kid to find out how much money they’ll need to make or save monthly to reach their goals!
