When most people think of bank accounts, they think of the two most common types of accounts held by bank customers: checking and savings.
These may be the bread and butter of bank accounts, but it’s important to know that there are a few different options available for the prudent saver.
One of the more attractive options is the money market account, which can be viewed as a slightly beefed-up savings account. (Make special note: money market accounts and money market funds are two different things!)
Money market accounts are backed by the FDIC, as long as the issuing institution is FDIC supported. If the issuer is a credit union, then the account is likely backed by the NCUA (National Credit Union Administration.) These are the most common insurers of money market accounts, but if you have any doubts, check with your bank.
Money market accounts carry a few restrictions, which is largely why money market accounts offer higher interest rates than standard savings accounts. Per the Federal Reserve’s Regulation D, account holders are limited to six “convenient transfers” per month.
This regulation does NOT apply to transfers made by phone, mail, messenger or at an ATM. Another difference that you’ll probably notice right away is that money market accounts generally require a large minimum balance. Dropping below that balance will likely incur steep penalties.
What are the interest rates on money market accounts?
On average, a money market account will give you a better return than a savings account and about the same return as a very short-term certificate of deposit. The current national average is about 0.15% Annual Percentage Yield on a money market account.
With this in mind, it’s safe to say that an investor who doesn’t need periodic access to their money will be better served by a longer-term CD.
It’s also worth noting that the minimum balance for a money market account will probably be higher than the deposit requirement of a higher-yield CD. (If you think a certificate of deposit might be more to your liking, be sure to read our questions to ask before opening a CD.)
A money market account is almost like a supercharged savings account, offering a government-insured means of earning a high interest rate while still keeping some access to your funds.
These accounts are offered up by most credit unions and banks, and they give you many of the same benefits as a standard checking or savings account – but with the promise of a higher annual yield.
Like any other banking product, a money market account carries both advantages and disadvantages. Knowing and understanding the pros and cons will help you in making a decision about your account selection.
Money Market Account Pros:
Higher Rate of Interest – Obviously, the main advantage is the ability to earn a higher interest rate on your funds when compared to regular savings accounts. Money market accounts typically feature a tiered earnings schedule, which means that your earnings potential will gradually increase as the account balance grows.
Protection Against Loss – Money market accounts are insured, usually by the FDIC or NCUA, for $250,000 per account. Risk is low, and many investors choose money market accounts for their safety.
Access to Your Funds – Money market accounts look very similar to certificates of deposit until you get to this point. Unlike CDs, money market accounts allow limited access to the account without incurring fees.
You will only be able to execute a few transactions each month (usually a maximum of six) without incurring a fee, and you will still need to keep your balance above the minimum required by your bank.
Money Market Account Cons:
Minimum Balances – These can be relatively high for some investors, usually beginning in the $2500 range. If your account falls below this balance, you’ll be assessed a penalty. For the sake of maximizing your earnings, it’s wise to view the minimum balance as money that’s no longer liquid (which makes the gap between money market accounts and CDs even narrower.)
Fees – You must always consider the service, maintenance, and transaction fees on any account before assessing its real value. Many institutions charge such fees, and if you’re not careful, you’ll find all of your earnings being swallowed up by these charges.
Earnings Linked to Market Rates – Money market accounts are linked to other markets, and the performance of the latter will determine the interest rates paid on the former. This may not be all bad, as this link can help reduce or eliminate the risk of inflation loss.
There you have it; the advantages and disadvantages of a money market account. Are you ready to open one of your own?