Making the best of your savings: money market accounts

Having a rainy day fund is necessary for every family. This money will support you in case if you lose your job or have an unexpected life-changing accident. A money market account is one of the financial instruments that can make your deposit grow. Contrary to a regular savings account, money markets provide a higher rate of return. It is also a good choice because of their restrictions on withdrawals and minimum balances – you will think twice before taking out your money.

A money market account is also known as MMDA, which stands for money market deposit account. It works similar to a regular savings account where you need to make a deposit to accumulate interest. The funds in the money market account will be invested. Typically, the banks or credit unions use them to grant loans to other people. However, they charge a higher interest for the loans than what they pay you for the account. This spread is the banks’ income. 

Money market accounts offer higher APY than savings account. Just compare: the average savings account at a local bank pays about 0.8% APY. With a money market account, banks pay about 2.5% APY. Interest rates can vary depending on a bank. Some banks are trying harder to get people to open a money market account than other companies, so they offer better terms.

Another difference between money market accounts and saving accounts is that the more money you have in your account the higher interest rate you will get. For example, the rates chart can look like that: $10K – 1.8%; $25K – 2.1%; $50K – 2.5%. 

Typically, you need to maintain a certain balance in a money market account to receive a higher rate of interest. The minimum balance averages between $500 and $2.500. Some banks impose penalties or fees if your account drops below the limit. Always check with the bank what minimum balance you are required to have to avoid fees.

Money market accounts let you withdraw your money anytime you need. There are several ways to access your deposit – free checks, ATM card and online transfers to and from your existing account. However, banks restrict the amount of withdrawals you can make in a month – from three to six transactions. There may be a fee for every excess withdrawal - between $5 and $15 per withdrawal. Repeat offenders may have their accounts closed.

Nowadays nearly all money market accounts provide online banking. It allows customers to make a balance inquiry, transfer funds, receive transactions information and choose investment options. Online banking can be especially beneficial if you have several different accounts (money markets or savings accounts). You can monitor your profit and expenses without any additional efforts.

Money market accounts are often confused with money market funds. Although they have a similar name, they do not mean the same financial tool. A money market fund consists of assets held by a brokerage or a bank on behalf of investors. On the contrary, a money market account is a deposit at the bank.

One of the main advantages of money market accounts is their security. You can be sure that you won’t lose your money if the bank or credit union goes out of business. The funds in a money market account are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. With credit unions, the money in a money market account is insured by the National Credit Union Administration (NCUA).

If you want to open a money market account, you can do it online. Web sites such as Bankrate.com provide the names of banks and credit unions that offer the best deals. All you need is to compare the terms and yields available for money market accounts. As we have already mentioned, different banks offer different terms. So decide what features are important for you. For example, if you are going to withdraw money, find money market accounts which allow up to six withdrawals per month. 

When you find a bank or a credit union that meets your requirements, you can just submit your application online. The initial deposit can be mailed as a check or transferred from an existing account.