If you have a large amount of cash in a traditional savings account, you may want to consider other ways to save money. One option is to open a money market account, which typically offers higher interest rates and more flexibility than a traditional savings account.
There are pros and cons to money market accounts, so it’s important to understand what it is and how it works. You may find that your money works better for you when it’s in a more growth-oriented account, like a money market account. Ready to learn more?
What is a money market?
The most attractive aspect of opening a money market account, especially when compared to a savings account, is that it typically offers a higher interest rate. However, most money market accounts offer some of the features of savings and checking accounts, including debit card access, check writing privileges, and ATM withdrawals.
Money market savings accounts are insured by the FDIC up to $250,000, so they’re considered a low-risk way to save money, just like a regular savings account. If you open an account through a credit union, your funds are likewise ncua insured by the National Credit Union Administration.
Depending on your financial institution, your interest can accrue daily, monthly, quarterly or annually. The more frequent the interest, the more money you make over time due to compounding.
Pros and Cons of Money Market Accounts
Money market accounts (MMAs) are a popular choice for savers looking to earn interest on their deposits while still having access to their money. However, like any financial product, mma has pros and cons that you should consider before opening an account.
Pros
- Higher interest rates: One of the main advantages of money market accounts is that they typically offer higher interest rates than traditional savings accounts. This is because banks and credit unions use the funds deposited into mma to invest in short-term, low-risk securities such as certificates of deposit (cd’s), government bonds, and commercial paper. The returns generated by these investments are then passed on to account holders in the form of higher interest rates.
- FDIC or NCUA Insurance: Money market accounts are FDIC or NCUA insured up to $250,000 per depositor, per insured bank or credit union. This means that if a bank or credit union fails, depositors’ funds are protected up to the insurance limit. Insurance provides peace of mind to depositors who are concerned about the safety of their deposits.
- Easy Access to Funds: Unlike CDs, which require depositors to lock up their funds for a period of time, money market accounts offer greater flexibility in accessing funds. Most mma allow depositors to withdraw or transfer a certain amount of deposits each month without penalty. This makes mma a great option for savers who need easy access to their funds for emergencies or unexpected expenses.
Cons
- Higher Minimum Deposit Requirements: Money market accounts typically have higher minimum deposit requirements than traditional savings accounts. This means that savers may need to deposit a larger sum of money up front to open an MMA. however, some banks and credit unions may waive the minimum deposit requirement if the account holder agrees to make regular deposits.
- Limited Transactions: While money market accounts offer more flexibility than time certificates of deposit, they still have limits on the number of transactions per month. Federal regulations limit the number of withdrawals or transfers from an mma to six per month. If depositors exceed this limit, they may be subject to fees or penalties.
- Lower Interest Rates Than Other Investments: While money market accounts offer higher interest rates than traditional savings accounts, they are typically lower than other short-term investments, such as Treasury bills or municipal bonds. This means that depositors looking to maximize their returns may need to consider other investment options.
How to Set Up a Money Market Account
To deposit cash into your money market account, you can use any of the methods used in traditional savings accounts, including electronic transfers. You can also deposit cash and checks if your account is with a financial institution that has a physical branch near you.
You will usually receive a debit card and checkbook associated with your money market account. This allows you to withdraw money at your convenience. This is another benefit that savings accounts don’t usually offer.
This keeps your funds liquid so you can use them quickly in a financial emergency. There are limits to how often you can withdraw your money, so read on to familiarize yourself with the limitations of money market accounts.
Limitations of a Money Market Account
While money market accounts do offer a degree of flexibility, there are some limitations. Most notably, you can’t withdraw money more than six times per month. This is a federal regulation, not one set by the bank. If you exceed this limit, you could be fined.
On top of that, you will receive a formal warning from your bank. If you continue to exceed the withdrawal limit after receiving a warning, the bank or credit union will eventually require you to transfer the funds to a checking account, so be aware of your actions and plan accordingly.
Minimum balances
Another restriction imposed by some banks (but not necessarily all) is minimum balance requirements. Many banks require you to open a money market account with at least $10,000 in it. Most importantly, you may also need to maintain a certain minimum balance threshold. If you don’t, you may be subject to bank or credit union fees again.
If you don’t meet the minimum balance requirement to open a money market account but still want one, you can pay a monthly fee to bypass the minimum deposit requirement. Just check to make sure it’s worth it.
It doesn’t make sense to pay an expensive fee that exceeds the monthly interest rate. If this happens, you’re better off keeping your money in a free savings account or other similar product. Take the time to calculate exactly how much you’re making (or paying) to determine if a money market account makes financial sense for your money.
Is a money market account right for you?
There are a number of factors that determine whether a money market account is right for you. Start by looking at your overall financial situation. Do you have enough in your checking account or other savings account?
Money market accounts are typically used for savings that don’t require regular access, so make sure you keep cash somewhere so you need it more frequently. Once you start saving on a large scale, you might consider opening a money market account.
Money Market Rates
Another thing to consider with a money market account is how competitive the yields are. Years ago, money market rates were more competitive than standard savings accounts. But today, interest rates are very low in all countries.
That’s fine if you’re borrowing money, but it’s not so good if you’re trying to save money to benefit from a high-yield savings account. Today, many money market accounts offer rates of less than 1%, sometimes even less. Determining which banks and credit unions are currently offering better rates is worth looking into.
The bottom line is that money market accounts do have limitations. If you can’t meet the minimum without paying a fee, or if you need to make frequent withdrawals during the month, you may need to look for another type of account.
But if you want to diversify your savings while still earning a nominal return, then consider a money market account. It’s low-risk and easy to access, so you have the flexibility to withdraw money when you need it – just not every day.
Alternatives to Money Market Accounts
While a money market account is a great savings vehicle, it’s wise to familiarize yourself with similar options. Savings accounts typically offer less interest than money market accounts, but this is not always the case – it really depends on the financial institution.
Savings Accounts
Savings accounts don’t allow you to write checks like money market accounts, but you usually don’t need a minimum deposit. Both types of bank accounts are considered low-risk and are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). They also have the same withdrawal limit of up to six withdrawals per month.
CDs
Another similar product is the time certificate of deposit (CD). Term certificates of deposit typically offer higher savings rates than money market accounts, but there’s a catch:you have to wait a certain amount of time before you can withdraw funds from a term certificate.
Unlike money market accounts, you will be penalized if you withdraw funds from a time deposit before it matures. You can choose your term, which is usually six months to five years.
While putting money in a time deposit is certainly part of your savings strategy, it’s not meant to replace liquid cash assets. You probably shouldn’t put your money in a term certificate of deposit because you’ll probably use it before the maturity date. But the longer you put it in, the more interest you expect to earn, so it definitely pays off as long as you have an overall savings plan.
Money Market Accounts vs. Money Market Funds
These two financial products are actually quite different, so be careful not to confuse Money Market Accounts (MMAs) with Money Market Funds (MMFs.) MMAs are low-risk savings accounts, while MMFs are investments in mutual funds, usually done through a broker.
While money market accounts are protected by the FDIC, money market funds are not. You’re not even guaranteed to recover your entire principal, let alone any return. Nonetheless, they are low-risk within the scope of the investment, but there is no financial safety net when it comes to insurance.
So what exactly do money market funds invest in? Most commonly, they focus on U.S. Treasury bills, commercial paper and other short-term debt securities. In any case, these are not volatile investments, and their yields are starting to rise as the Federal Reserve (fed) begins to raise interest rates.
Final Thoughts
Like all savings vehicles today, savers don’t see much difference between these products. Whether you’re considering a money market account or something else, be sure to check the specific terms offered by your bank and don’t be afraid to shop around.
If you’ve been saving since before the recession of the mid-2000s, you may remember that the annual percentage rate of return actually gave you a decent return. But today’s market is different because the country is still struggling with an economic recovery. For savers, that means taking a closer look at what kind of interest rate you can get.
It also means making sure you don’t end up losing money by paying high fees or putting your money in a low-yield savings account with too many restrictions. In many cases, a money market account may be the next step in your overall savings program.
