August 2, 2018

What is a Money Market Account?

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Do you toy with the idea of putting some of your checking account funds in a savings account? Are you tired of not making any interest? You probably won't make much more on your savings account either. But, if you open a money market account, you increase your chances of earning higher interest rates.

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    CIT Bank

    Money Market Account - 1.85% APY

    • 1.85% APY
    • $100 Minimum Opening Deposit
    • No monthly maintenance fee
    • FDIC Insured

A money market account is a cross between a high-yield savings account and a checking account. These accounts sometimes have higher interest rates than your standard savings account at your local bank. But, unlike your savings account, they often come with a checkbook and/or debit card. As with any account, there are pros and cons.

Read on to learn if the money market account may be right for you.

How Does a Money Market Account Work?

When you open a money market account at the bank, you make a deposit, typically over $1,000. The bank agrees to pay you a specific interest rate on that money.

Once you deposit the money, it sits in your account collecting interest, much like a savings account. Unlike the savings account, though, you'll have access to your funds by writing a check, using your connected debit card, making an in-person withdrawal, or transferring funds online.

You don't have to make a specific number of deposits for the MMA. You won't have to limit the number of deposits you make either. The bank will limit the number of withdrawals you make, though.

The amount of interest you make will vary by bank. Whichever bank you choose, always make sure it's FDIC insured.

How Safe Is a Money Market Account?
The FDIC insures money market accounts, just like savings accounts. They insure up to $250,000 per depositor. This means that if the bank you held your money market account with went out of business, you could still recapture your funds.

What Is a Money Market Account Good For?

Money market accounts offer higher interest rates than savings accounts, but less than CDs. Because of this, your best use of this account is for funds you may need relatively soon. A CD ties up your funds until the maturity date. This could mean anywhere from 6 months to 10 years, depending on the term of the chosen CD.

If tying your funds up in a CD seems too risky, the MMA may offer a good compromise. A few examples of its best uses include emergency funds, vacation funds, or money for a down payment on a home. Basically, if you need liquid funds but want to earn interest on those funds, the money market account may be a good option.

If you know you'll need frequent access to the funds, a money market account won't be the best option, though. The bank pays higher interest rates on MMAs on the assumption that you'll leave the money in the account. This allows the bank to use the funds for their purposes. If you make frequent withdrawals, you'll need a checking account that doesn't limit your withdrawals, but also doesn't pay the higher interest rates.

Can You Lose Your Money in a Money Market Account? A money market account is not a money market fund. You can't lose money on a money market account as long as the bank is FDIC insured. A money market account isn't an investment; it's a deposit account. A money market fund, on the other hand, is an investment and does pose a risk of loss.

Pros of a Money Market Account

  • You may be able to make higher interest rates on the money market account. Interest rates vary by bank, and some banks offer very similar rates for both accounts. Some banks, however, offer higher rates, especially for higher balances.

  • You may have access to checks for the money market account. Some banks offer a checkbook with your money market account. This gives you easy access to your funds, should you need them.

  • Your investment is liquid. If you have an emergency and need your funds, you can close your money market account at any time. You don't have to worry about fees or penalties for closing the account early. The money is as liquid as it would be if you put the cash under your mattress (with the exception of having to wait until a business day to access your cash).

  • You don't have to watch maturity dates. Money market accounts don't mature at a certain point. You deposit the money and it sits in the account as long as you want it there. This is unlike CDs, which are often competitors to the MMA. With CDs, you have to watch the maturity dates and decide whether to reinvest the money or withdraw your principal and earned interest.

  • You can often find money market accounts at your local, brick-and-mortar bank. You don't have to rely on the higher interest rates offered by online-only banks. Money market accounts usually yield slightly higher interest rates than savings accounts (but not always). Check with several banks to see which offers the highest rates.

  • You don't need to be approved for a money market account. If you wanted to invest, you would have to apply for a brokerage account. Different brokers have different requirements that may leave you without an account. Money market accounts are just like savings accounts. You open the account in person or online with your cash deposit.

Tip: Many banks offer bonuses for opening a new account. Check out a list of the best bank promotions that do NOT have a direct deposit requirement.

Cons of a Money Market Account

  • You are limited to six withdrawals per month by the Federal Reserve. This includes any type of withdrawal, whether debit card transaction, internal transfer, external transfer, or check. If you need to make more frequent withdrawals, you may be better off with a high-yield checking account.

  • Many banks require a high initial deposit and/or monthly balance. Because of the higher interest rates offered on money market accounts, it's not unusual for banks to require a minimum initial deposit between $1,000 and $10,000. You may also have a monthly minimum balance to meet in order to avoid maintenance fees.

  • You may make less interest than you would on a CD. Even though you have the benefit of liquidity, you lose some interest by having access to your funds. If you could tie your money up in a CD for some time, you may make more interest. This is especially true if you participate in CD laddering, continually reinvesting your funds for a larger return.

Bottom Line

If you want a liquid account that pays decent interest rates, you may be a good candidate for the money market account. If you want the best of all worlds, with decent interest rates, access to your funds, and FDIC insurance, the money market account may be a good option.

As with any bank product, shop around for the best interest rates. You can try your local banks as well as online banks (they may offer higher rates due to lower overhead).

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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