What is a Money Market Account?
Money Market Accounts (MMA) are similar to savings accounts offered by banks, credit unions, and other financial institutions. But MMA is more elegant. Unlike savings accounts, money market accounts pay higher interest rates and offer better benefits, such as checkbooks and debit cards.
However, like a savings account, your MMA is insured by the federal government. Over the past ten years, MMAs lost their appeal when interest rates fell to historically low levels, and the stock market soared. But as interest rates (mortgages, car loans, etc.) rise once again and the stock market finds itself in rough waters, some consumers turn to MMA as a haven to protect their cash and earn a profit.
How does a Money Market Account work?
It works like a savings account. It is sometimes called a money market deposit account or money market savings account. Opening an MMA is easy, and some accounts do not require any initial payment. However, you generally need $ 100 to open an account in person or online.
However, the government typically limits savings and MMA account withdrawals to six per month, either by check, debit transaction, or wire transfer, although this rule recently suspends in the wake of the economic impacts of COVID-19. That six-transaction limit doesn’t apply to ATM withdrawals and phone payments.
Most money market accounts require a minor balance. If you make more withdrawals than allowed or don’t maintain the required minimum balance, banks generally charge a small monthly “maintenance” fee. Some banks can convert your MMA into a savings account. Others may even close it.
Interest, expressed as an Annual Percentage Yield (APY), is compounded daily or monthly. The sweet dividend, the interest payments are generally paid monthly.
Benefits of an MMA
MMAs are suitable for anyone who wants a safe and accessible place to save and earn some interest (higher than savings accounts) on their money. But people who open MMA often have short-term goals in mind. They may want to accumulate a large amount of money to use for sudden emergencies, for example. Or keep cash in reserve between investment opportunities.
How about accessibility? Most people who work and regularly receive a paycheck funnel their earnings into a simple checking account that never pays APY. So why not hide your money in an MMA that pays interest and allows you to write checks?
If you need to write many checks each month, you can open two MMAs with a low minimum balance to exceed the limit of six transactions per month. Or you can open a high-yield checking account.
A Money Market Account versus a money market fund
Main Street uses MMA, and Wall Street uses money market funds that are mutual funds. Like MMAs, people open money market funds (MMFs) to hold their money short-term. And typically, investors use MMFs to accumulate cash while they wait to execute the subsequent purchase of a large company, stocks, or real estate. MMFs are low-volatility investments. Some even generate tax-exempt income.
But keep in mind that the FDIC does not insure the money in these funds. Another complaint about MMFs is that they will charge you an annual expense ratio (or administration fee) on the money in the account because they are mutual funds.
Investors often use FMMs. I am pretty familiar with them, and I have one in my retirement account (IRA) and another in my brokerage account. I need these funds to put money into my IRA and brokerage budget to buy and sell stocks, exchange-traded funds (ETFs), and mutual funds. It is like a transfer station.
Why isn’t MMA for everyone?
A money market account may not be the best option if you need a piggy bank to finance monthly expenses. It might seem like MMA makes sense if you’re saving for future purchases like a new car or vacation. But there are also other options that you should consider.
For example, certificates of deposit (CDs), another savings product, offer higher interest rates than MMAs. And like MMAs and savings accounts, CDs are FDIC insured.
Are Money Market Accounts Worth It?
I have never been involved in MMA and have found that online savings accounts sold by significant banks have competitive interest rates. That is why I have online savings account linked to my wife’s checking accounts and my IRA and brokerage accounts.
I first opened the account in 2001. No matter my balance, I have never paid a fee or a penalty. I can access my money in 24 hours. When the money arrives in my checking account, I quickly transfer it to my savings or brokerage account. I don’t want my money to stay there without any interest!