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But now you’re hearing you may earn more money on your money by putting it into a money market account.
What the heck is a money market account? Is it a savings account or an investment product?
Is it the best place for your money?
A Money Market Account Is:
A bit of a hybrid account, similar to a traditional savings account that pays interest on funds it holds, but with some benefits of a checking account -limited check writing and debit card transactions.
The FDIC’s Deposit Insurance Fund and the National Credit Union Share Insurance Fund (NCUSIF) protect your total deposits and any interest earned, up to $250,000 per FDIC-insured bank or NCUA-insured credit union.
Like a savings account, MMAs do not have limits on the number of deposits or in-person / ATM withdrawals you can make.
But, also like with savings accounts, under the Federal Reserve’s Regulation D financial institutions can limit you to no more than six (6) ‘convenient transfer or withdrawal’ transactions in your MMA during one month.
These convenient transactions include:
- Online transfers of money between your MMA and other accounts
- Automatic transactions or scheduled payments for a credit card or another bill
- Over the phone or fax machine requests for transfers or withdrawals (unless funds are mailed in a check to you)
- Checks written from your MMA
- Debit card transactions
When you exceed six convenient withdrawals or transactions in a month, your bank may hit you with a fee. Repeated abuse of the rule may cause them to revoke your transactional privileges or even close your account.
Note: A money market account is not a money market fund, which we explain below.
How is an MMA Different from a Savings Account?
When you deposit money into a traditional savings account, the financial institution can use the funds to make loans. But it’s not able to invest your savings funds in any way.
With a money market account, the bank is legally permitted to not only loan the funds but also invest the funds in low-risk investment products such as certificates of deposit (CDs) or treasury notes.
Because of this, MMAs typically pay a higher interest rate than a savings account.
With the ability to write checks and conduct some debit card transactions, it provides more versatility too.
Any Downsides to a Money Market Account?
Many money market accounts require a minimum deposit amount to open and a minimum balance to maintain.
You might find your financial institutions charges a fee or pays varying interest rates depending on the account balance.
It’s critical you understand the particulars of your account to avoid unnecessary charges and earn the highest possible interest rate.
If you anticipate frequent withdrawals from your account or a dip in balance below the minimum, your money might be better in a high-yield online savings account.
While MMAs usually pay higher interest rates than many local banks or credit union savings accounts, you might do better with a certificate of deposit. But only if you do not anticipate needing the funds before the CD matures.
So What’s a Money Market Fund Then?
Money market funds (MMFs) may have some similarities to MMAs – higher interest rates and check-writing abilities – but they are vastly different. The FDIC or NCUA does not cover deposits in an MMF.
You’ll find money market funds available through mutual fund companies and brokerages. While MMFs may be available at some banks, they are not FDIC insured.
Another difference between an MMA and MMF is that check-writing transactions are not limited in an MMF. However, they may require you write the check for a minimum dollar amount or they may incur transactional fees.
Money market fund accounts are usually used to house funds you’re waiting to invest in the market. Or funds you may need in a relatively short period, or in an emergency, that you don’t want to hold elsewhere.
Types of money market funds include:
- Treasury Funds – Invest in securities issued by the U.S. Treasury
- Government Funds – Invest in bonds and the government-sponsored agency issued debts
- Prime or Taxable Funds – Short-term corporate debt, domestic and foreign
- Tax-Exempt Funds – Short-term debt of state and local governments
Money market funds are often considered safe since they strive to preserve the value of your investment at $1.00 per share. But MMFs can lose money.
Over long periods, MMF yields are usually slightly higher than MMA returns, but lower than you would earn with bonds, and significantly less than what you would make with equities/stocks.
Is a Money Market Account, an MMF, or a Different Savings Account Right for Me?
- A money market account is a great place for your savings if you’re working towards an important financial goal or want to maintain a large emergency fund, while still having convenient access to your money and check-writing privileges.
- If you’ve no need to write checks, interest rates for online high-yield savings may be higher so compare before committing to an MMA. If locking your funds up for some time is not a concern and maybe even a desire, a CD may earn you a higher interest rate.
- Money market funds are good options for investors who don’t need to access the money routinely, and like it tied to their investment account for ease of moving funds in and out of the market.
You want to earn more money for your money as you work to build a financially secure future.
But it’s important to compare not just interest rates, but also minimum balance requirements, potential fees, and the ability to access your money, before deciding if a money market account is the best vehicle for your savings.
Vicki and Amy are authors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.