You’ve got a decent amount of cash but aren’t sure what to do with it. You could put it in a savings account, but with its low interest rate, it’s just not that appealing to you. You’re looking for something that’s low risk but can offer you a better return. Surprisingly enough, there is an option. It’s called a money market account, and it’s most likely been right under your nose this entire time – it’s a common account offered by both banks and credit unions. Intrigued? Read on to learn exactly what it is. Who knows? It may be exactly what you’ve been looking for.
What is a money market account?
“As the name suggests, money market accounts (MMAs) follow the trends of financial markets to generate interest for depositors. Instead of using these deposits to fund mortgages and other credit instruments, banks reinvest your savings into traditionally secure, short-term holdings. Treasury bills, bonds and other stable investments tend to make up the bulk of banks’ money market account investments,” writes MoneyRates.com. Banks then take these dividends and pass them along to you in the form of higher interest rates.
Simply put, MMAs are another resource you can utilize to save money. It’s a type of savings account that’s offered by banks and credit unions. The difference is that it can usually pay higher interest, has higher minimum balance requirements (it can sometimes be anywhere from $1,000 to $2,500), and only allows three to six withdrawals per month, according to How Stuff Works. Many MMAs will also let you write up to three checks each month.
If you have a money market account through your bank, it’s insured by the Federal Deposit Insurance Corp. (Read: Your money will still be there even if the bank or credit union goes out of business.) Keep in mind, there is a difference between a money market account and a money market fund. A MMF is offered by brokerages and is not FDIC insured. Its value may also fluctuate, causing you to possibly lose money over time, says MoneyRates.com.
Things to keep in mind
If your balance falls below the minimum, you will most likely be subject to penalty fees, per Banking My Way. In addition, a MMA is usually limited to six transactions per month, and that includes three that can be check or debit card transactions. If you go over that limit, you could once again be subject to fees. Banking My Way recommends using a MMA as a place to store your emergency savings fund (as long as you have enough built up.) This way you have access to it if you find yourself needing it, and while it sits there, it’s providing you a higher interest earning than you’d get with a traditional savings account.
Who should consider a MMA?
A money market account is a great option for anyone hoping to save money, according to Bankrate. But, it’s not for someone who is struggling to get by and living paycheck to paycheck. You need a little more financial security before qualifying for a MMA. You want to consider it if you can afford to start an account that has a minimum balance ranging from $1,000 to $2,500. “If you can’t keep your balance above the minimum, however, the added interest you earn will not be worth the fees you are charged,” according to Banking My Way. Bankrate suggests keeping your money in a MMA and letting it grow from the higher interest rate, while figuring out where you may want to invest it later. A MMA is great if you want to start saving some serious cash. But, before you do, just make sure that you plan on keeping a decent balance in your account, per MoneyRates.com.
The Bottom Line
A money market account could be a good option for someone who has a large chunk of cash that they want to save. It can work great as an emergency fund because it’s accessible and will yield a higher interest rate. But, a MMA isn’t right for people who use their savings as a backstop for their checking, according to LearnVest. So, if you frequently find that you’re dipping in to your savings to supplement your checking account balance, you probably want to stick with your savings account. LearnVest recommends having two savings accounts: one that is attached to your checking account for immediate and quick access, and another (a MMA would apply here) where you can save while maximizing your interest.