Most of us have a checking account and a savings account with a financial institution because those are the most common account. The majority of people don't even know what a money market account is because they don't know it's an option, or weren't offered it when they signed up with their bank.
What are Money Market Accounts?
According to Bankrate, "These funds invest in short-term debt securities but are not federally insured like bank accounts." Money Market Accounts, or MMAs for short, are another kind of savings account with a few restrictions.
These accounts require a minimum balance somewhere between $5,000 and $10,000, taking them off the list completely for some people who don't have a large amount of money to invest. In exchange for the large minimum balance requirement, money market accounts offer higher interest rates.
Where did They Come From?
Until the 1980s, banks had interest rates capped for them by the government so they couldn't compete by offering higher interest rates. People were taking their money out of regular savings accounts and putting it into money market mutual funds that paid an interest rate based on the market. In 1982, Congress passed a law allowing banks to offer these money market accounts to get the consumer money back into the banks.
How do They Work?
Money market accounts are like a combination of checking and savings accounts. You can put money in and write checks, but only a limited number of checks can be written each month. The interest rates vary from bank to bank and if you move money out of the account more than the allowed number of times, the bank will change your account to a traditional checking account or charge you fees for the extra transactions.
Money market accounts are great places to park a large chunk of money that you need easy access to. They make great emergency funds because most people don't have more than 6 emergencies in a monthly period. You have easy access to the money if you need to write a check for a one-time expense like a car accident, large medical bill, or an emergency home repair.
The goal of financial institutions is to make money for their investors and owners. Money market accounts help them achieve this goal. The Simple Dollar sheds a little more light on the subject by explaining that banks have fewer restrictions on money market funds and that gives the bank or credit union more options in what they can do with the money. The bank can take your money and invest it into things such as certificates of deposit, municipal bonds, treasury notes, and other investments that are considered very safe. The money helps the bank make more money and so they give you a higher interest rate because of that.
Why you Might Want a Money Market Account?
Like your regular savings account and checking account, money market funds are also insured by the Federal Deposit Insurance Corporation (FDIC) for losses up to $250,000 (http://www.bankingmyway.com/save/money-market/why-you-should-have-money-market-account). If you already have the maximum amount in your other checking and savings accounts, it's a good idea to open another account so that all of your money is insured. Money market accounts can also be helpful if you're looking to place a chunk of money for a certain amount of time until you have to pay a large bill or move the money to another more permanent account. You could use the account to store tax payments if you own a large business or as a holding place between investment accounts.
What are the advantages and disadvantages?
The most obvious advantages of a money market account are:
- Easy access to your money
- Higher interest rates
- Low risk
But the disadvantages are:
- Requirement for a high balance
- Limited withdrawals and transfers
- Fluctuating interest rates
- Fees and penalties for going below the minimum balance and over the transaction rate
Other Ways to Use a Money Market Account
Many people use money market accounts as a piece of an overall financial plan. Use it like a hub for your money. It can be a central place to hold money until you're ready to move it to other accounts like your checking account, an IRA, a CD, or another type of investment. It's also a great way to save for a larger purchase like a vehicle or a family vacation. You're able to take the money out right away, but it's earning a higher interest rate than an average savings account. The money market account also keeps the money out of your regular checking or savings account where you're more tempted to use it for things you don't need. There are no limits on when you can put money in. Every time you have a little extra money, add it to the money market account and watch your money grow.
What to Look For in a Money Market Account
- Ask about Fees and Penalties. Some banks charge fees if your balance goes below the minimum. Others charge a fee to set up this kind of account. Is there a fee for going over the maximum number of transactions, or does the account get closed. Other banks charge you a fee to have a debit card for the account. Ask for a complete list of restrictions and fees before you open an account.
- Interest Rates. How is the interest compounded? Daily interest makes you more money over the long term than monthly or yearly interest. Also ask if interest rates fluctuate daily or monthly.
- How Much is the Minimum Balance? Not all banks require the same amounts for the minimum balance. Some may require $5,000 while others require $500.
Money market accounts can be another piece of your financial puzzle to help you meet a savings goal or just to help you park some money until you're ready to move it somewhere else. These accounts aren't for everyone, but consider a money market account if you're looking to build an emergency fund or save money for a large purchase.