What Money Market Account Is And How It Works: Are you looking for a safe and secure place to park your savings, while still earning a competitive interest rate?
If so, a money market account might be just what you need! A money market account is a type of savings account that offers higher interest rates than a traditional savings account, while still providing easy access to your funds. In this article, we’ll provide a creative introduction to money market accounts and explore how it works, their benefits, drawbacks, and their alternatives. So, let’s dive in!EnoughInfo.com
What is a money market account?
An interest-bearing account at a bank or credit union is referred to as a money market account (MMA). Money market accounts, also known as money market deposit accounts (MMDA), include various features not present in other types of accounts. Most money market accounts include check-writing and debit card facilities and typically provide greater interest rates than standard (passbook) savings accounts. Additionally, they might have limitations that make them less adaptable than a standard checking account. They are crucial for figuring out tangible net worth.
FAQs & Answers on What Money Market Account Is And How It Works
1. Why are money market rates so low?
The Federal Deposit Insurance Corporation reports that the current average rate for money market accounts is 0.23%. The annual percentage yield, or APY, that you receive from a money market account is dependent on a number of variables, including the current state of the market and the financial institution with which you choose to open the account. The interest rates offered on money market accounts by traditional banks are often lower than those offered by online banks.
2. What are the steps involved in closing a money market account?
Call the customer support number for your bank if you would like to close your money market account. You should be able to speak with a person who can guide you through the process of closing the account and withdrawing any money that is still in it. You have the same flexibility with regards to closing a money market account that you have with checking and savings accounts.
3. What is the best money market account?
In general, the finest money market accounts do not demand a minimum balance and do not charge any monthly maintenance costs. Furthermore, they provide reasonable interest rates. Additionally, they should have insurance through the FDIC (in the case of banks) or the NCUA (in the case of credit unions).
How Money Market Accounts (MMAs) Works
Customers can open money market accounts at credit unions, traditional brick-and-mortar banks, and internet banks. They provide account users the characteristics of a checking account along with some of the main advantages of a savings account, such as:
Interest: Just like with savings accounts, MMA account holders can receive interest on their remaining balances. Typically, the interest rate offered is higher than that of a conventional savings account. However, the interest rate is frequently variable, which means that it changes as the state of the market changes.
Debit Cards: Some banks provide customers with a debit card that they may use to make deposits, withdrawals, and transfers at automated teller machines (ATMs).
Check Writing: In addition to using debit cards, customers could also be able to write checks against the balances of their accounts.
In order to start an MMA, banks frequently require a minimal initial deposit, and balances must be kept above a predetermined level while they are operational. In the event that the balance is below that minimum, banks may levy a service fee.
People who have short-term goals in mind and want to earn more interest than they would with a savings account should consider money market accounts. So, if you’re putting money aside for a specific purchase, such as a trip, a car down payment, or for a rainy or emergency fund, an MMA might be a good idea. They are not designed for lengthy objectives like retirement.
The advantages of money market accounts
Similar benefits to those of savings accounts, checking accounts, and even certificates of deposit may be found with money market accounts. One of a money market account’s primary advantages is that:
Safety: If money is kept in a bank or credit union that is FDIC insured, money market accounts may provide protection and security. These accounts offer a low-risk alternative to save money that you don’t immediately need to spend or use. But keep in mind that a money market fund and an account are not the same thing. In contrast to savings accounts, money market funds are a form of mutual fund that invests in short-term debt instruments.
Flexibility: If you have many accounts at the same bank, it may be handy to deposit money into a money market account or transfer money across connected accounts. It can be simpler and less stressful to handle tasks like paying bills, funding significant costs, or taking care of an emergency if you have a connected debit or ATM card and the ability to issue checks. Money market accounts can also be utilised to finance a variety of short- and long-term financial objectives.
Competitive rates: Money market accounts have attractive rates compared to other deposit account types. Your money has a greater chance of increasing in value over time if your APY is higher. A money market account can be a suitable fit for your needs if getting the greatest interest return on your savings while keeping your funds accessible is a goal.
Access: It’s crucial to have your money on hand when you need it. Unlike certificates of deposit, which force you to leave your money in the account for a specific amount of time, money market accounts let you access your money whenever you choose. Depending on the choices your bank provides, you can withdraw money from an ATM, send a cheque or electronically transfer money if you ever need to dig into your savings for whatever reason.
The Disadvantages of money market accounts
When opening a new type of bank account, it’s crucial to think about any potential drawbacks. When it comes to the following, money market accounts can fall short of savers’ expectations:
Minimum balance requirements: The minimum deposit required to start a money market savings account varies depending on the bank. While some banks may only require $1 to open an account, others may demand that you deposit $5,000 or even $10,000. Your options for creating a money market account may be constrained if you can’t satisfy the bank’s minimum deposit requirement if you’re just starting to save money.
Interest rates: While some money market deposit accounts can provide excellent rates for savers, others might provide a rate that is comparable to the annual percentage yield (APY) you could get from a typical savings account. Or, in order to be eligible for a higher rate, your account may need to have a minimum balance of $5,000 or $10,000. In any case, a money market account could become less appealing if achieving the greatest interest rate on your savings is your first priority.
Fees. It’s usually a good idea to be aware of potential costs associated with any bank account. Banks have the right to charge money market accounts monthly maintenance fees just for keeping the account. While it might be possible to avoid the fee by keeping a minimum daily balance or having a direct deposit, not all banks provide a way to do so. The bigger the cost is, the more it might reduce the monthly interest that is earned on your savings.
Limits on withdrawal: When it comes to withdrawal restrictions, money market accounts and savings accounts also have certain similarities. In the past, federal Regulation D restrictions applied to these accounts, capping easy withdrawals at six per month. As a result of the coronavirus epidemic, these restrictions were temporarily lifted, although individual banks are still free to set their own restrictions on withdrawals from money market accounts. Additionally, if you withdraw more than those allowed amounts, they can charge you a fee.
Money Market Accounts (MMA) alternatives
Many different types of accounts are available from banks and credit unions, some of which can compete with or even outperform money market accounts due to their features.
Savings Passbook Accounts
Regular savings accounts normally don’t demand an initial deposit or a minimum amount, unlike money market accounts. Although typically not as much as a money market account, they also pay interest. Passbook savings accounts are FDIC- or NCUA-insured, much as money market accounts.9 To find out whether there are any withdrawal limitations, contact your bank.
High-Yield Savings Accounts
Numerous banks and credit unions also provide high-yield savings accounts; the interest rate offered by each institution may be higher than that of its money market accounts. Savings accounts with high yields are also FDIC- or NCUA-insured.3 They might have more regulations than money market accounts, like requiring direct deposits, which could be a drawback.
Regular Checking Accounts
Unlimited transactions, such as checks, ATM withdrawals, wire transfers, and other financial activities, are a major benefit checking accounts enjoy over their money market relatives. Additionally, they are FDIC or NCUA insured.53 Their primary drawback is the extremely low (often zero) interest rate they charge.
High-Yield/High-Interest Checking Accounts
These accounts, like high-yield savings accounts, provide interest rates that are comparable to and occasionally higher than money market accounts. They also share the main drawback of high-yield savings accounts, namely the possibility of more onerous regulations, such as a minimum number of debit transactions each month.
Additionally, they impose a limit—say $5,000—beyond which the high-interest rate does not apply. High-yield checking is similar to ordinary checking in other ways, like having unlimited checks, a debit card, access to ATMs, and FDIC or NCUA protection.
Checking Account with Rewards
This kind of checking account could come with a welcome bonus in addition to other benefits like high yields, ATM charge reimbursements, miles for travel, or cashback. Similar to high-yield checking, the major drawback is hefty fees unless the depositor complies with all the conditions, which vary by institution. Rewards checking otherwise operates similarly to a standard checking account, with FDIC or NCUA protection.
CDs, or certificates of deposit
A CD functions similarly to a savings account and has a set term, such as three, six, nine, or 12 months, or up to ten years. Depositors typically receive a greater rate of interest than they would with a typical savings account in return for locking in their money for that length of time. However, they will incur fees, typically in the form of interest lost, if they take their money (or a portion of it) out early.
Some CDs (referred to as liquid CDs) pay a lower interest rate but don’t penalise depositors for taking early withdrawals. Although CDs are FDIC- or NCUA-insured, they typically do not permit cheque writing, debit card withdrawals or balance additions after the initial deposit.
When it comes to holding money for unexpected expenses as well as other savings goals, a money market account is one of the best options. A money market account is the right choice for you if you want to start saving money, receive interest on your assets, and keep access to those funds all at the same time. Always take into consideration the interest rate, the required minimum amount, and the monthly fees when comparing money market accounts.