If you’re looking to tuck away some money that you simply can’t afford to lose, consider investing it in a money market account. You won’t get rich with a traditional money market account, but you can count on your money being there when you need it. While similar to a savings account, a money market account does have some distinct differences. Here’s a look at all the ins-and-outs of what a money market account is, how you can use it and how it differs from similar products.
What Is a Money Market Account?
A money market account is a deposit account that is insured by the Federal Deposit Insurance Corporation, just like a CD. At a credit union, a money market account is insured by the National Credit Union Administration instead. These accounts earn interest, often at a higher rate than regular savings accounts, but they usually have certain restrictions. Specifically, they share the same six withdrawals per month limit as regular savings accounts on payments made by debit card, check, electronic payment or draft. In-person, telephone and ATM withdrawals do not count against this six-withdrawal limit.
How Does a Money Market Account Work?
Structurally, a money market account works in the same way as a regular savings account. In exchange for your deposit, a financial institution will pay you interest; unlike with a CD, you can have access to your funds whenever you’d like, subject to the restriction on excessive transactions.
A money market account will often pay a higher rate of interest than a savings account because most money market accounts require a higher deposit. To earn the interest that they pay customers, banks take the funds deposited in a money market account and lend them out to borrowers, or otherwise invest them.
Money Market Account vs. Other Savings Accounts
There are more similarities than differences between money market accounts and other savings accounts. The main difference is in the level of interest paid and the required minimum balance. There also might be differences in the level of access to your invested funds. Here’s a look at the main characteristics of money market accounts and other savings accounts.
At a Glance: Money Market Account vs. Other Savings Accounts
Take a look at the main factors of each account:
|Money Market Account vs. Other Savings Accounts|
|Type of Account||Interest Rate||Minimum Account Size|
|Money Market||Traditionally higher than regular savings accounts||Usually at least $2,500-$10,000|
|Traditional Savings||Usually the lowest among savings-type accounts, but above checking account rates||Can be as low as $0, although some banks require $100, $1,000 or more to avoid service fees and/or to earn interest|
|High-Yield Savings||Often higher than money market or traditional savings accounts||Generally higher than what is required at a bank’s traditional savings account; may be as low as $0 at some online banks|
|Certificate of Deposit (CD)||Typically the highest APY of the bunch, depending on maturity||Can be as low as $0; $100,000 deposits in jumbo CDs may earn the highest yields|
Money Market vs. Savings Account
Standard savings accounts are nearly twin sisters to money market accounts, at least in the way they operate. However, money market accounts typically have higher minimum deposit requirements, sometimes as high as $10,000 or more. Basic savings accounts often have low minimums but may pay lower yields, on average.
Money Market vs. High-Yield Savings Account
High-yield savings accounts have gotten quite competitive with money market accounts when it comes to yields, and they generally share the same withdrawal restrictions. However, most high-yield savings accounts are offered by online-only banks, which can make deposits and account servicing more inconvenient.
How to Choose a Money Market Account
As with any investment, the money market account you should choose is the one that is most in line with your needs. Since financial services is a competitive industry, banks and credit unions are constantly battling for your business by offering higher yields, lower fees or additional features.
Fees are an important starting point, as high fees can eat away at your investment returns. Many banks offer no-fee money market accounts, so if you’re looking at an account that charges you any type of fee, make sure the benefits outweigh the costs.
High yields are the ultimate objective of any money market account investor, but they may come at a cost in terms of convenience or service. Many of the highest-yielding money market accounts are offered by online-only banks, so if you feel the need to walk into a branch or speak with a banker face-to-face, you might prefer a more traditional account, even if it yields less.
The bottom line is that the best money market account for you is the one with the best combination of all of these features.
Should You Open a Money Market Account?
You should open a money market account if you need a safe place to save your money but you still want to be able to access it. While longer-term goals might be better served in a CD account, or even the stock market, short-term savings that you might need to draw upon at a moment’s notice are a good candidate for a money market account. Remember to comparison shop for an account with the highest yields, the lowest fees and the easiest access for your particular needs.
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