Money Market Account Overview
A money market account is a unique type of savings account that usually come with higher APYs. Due to the decline in interest rates that have hit the markets since 2008, most money markets have seen a significant drop in interest rates which has brought them to an almost similar level as other standard savings account. The good news is that there is still a number of banks which are providing MMAs with decent interest rates making them better than a regular savings account.
The high APYs of money market accounts do come at a price though. MMA accounts require higher minimum balances as compared to other savings account. This may limit the number of people that can access the accounts. If you shop around, you may come across banks offering MMAs with reasonable minimum balance though.
One of the reasons why money market accounts attract higher APYs than a standard savings account is due to what the bank does with your money. In savings accounts, most banks will only use your deposits to loan other people. When it comes to MMA, some banks may decide to invest the money on low-risk investments including government securities and certificates of deposit. Does that mean that you can lose your savings through the investments? No, it doesn’t. The money in MMA is insured by the Federal Deposit Insurance Corp. This protects you against losses that may occur as a result of the low-risk investments that the bank is making with your money.
MMA accounts will earn you more money if you keep the balances high. That’s because most banks will adjust APY applied to your account depending on the amount of money that is in it. For instance, the Bank of America MMAs will earn you between 0.03% and 0.04% for balances between $10,000 to $49,999 while balances exceeding $100,000 will attract a higher APY of 0.06%. On the other hand, the Capital One 360 MMA has an APY of 0.60% for balances between $1 to $9,999 while all other balances will earn you 1.00% in APY. You might also come across a number of banks that have a flat rate regardless of the balance that is in your account. A good example here is the Chase Savings Plus which earns a flat 0.01% on all balances. Therefore, it’s upon you to shop around and choose an account that suits you best. You can also check our review on the Best Money Market Accounts for more details on some of the most recommendable MMAs in the market.
What are the benefits of Money Market Account?
Some banks will allow you to earn even more money from your Money Market Account if you open and link a checking account. The bank will apply what they refer to as “relationship rates” which will boost your earnings. However, checking accounts also require minimum balances and Several fees may also be applied.
You can also save a lot of money by opening MMA with other accounts in the same institution. That’s because some banks may combine the balances in the different accounts you have to calculate whether you qualify for a monthly fee waiver or not. Therefore, the more the accounts you have and the higher the balances, the higher the chances that you might pay less or avoid most of these fees. Some institutions may also allow you to set a recurring automatic deposit going from the checking account to the MMA and this will also save you from the monthly fees.
MMA Vs. Standard Savings Accounts
Money market accounts beat a standard savings account in various ways. Frist, MMAs attract higher APY than standard savings accounts. You will also get even more earnings if you open an account with a bank that increases the APY when you increase the balance.
With MMA, you can also write personal checks something that’s impossible with the standard savings account. You’ll still be limited to six withdrawals per month as is the case with most other savings accounts, but it’s very convenient nonetheless.
On the flip side, MMAs will ask for a higher initial deposit and higher minimum balance than the standard savings account. Also, if you do not reach certain average balances, you won’t get the monthly fee waiver which means that your earning will be reduced.
Most MMAs will also charge you an in excess fee if you make more than 6 transactions in a month.
MMA vs. CDs
CDs or Certificates of deposits earn more interest rates than money market accounts. However, CDs are time deposits, and hence once you deposit your cash, you won’t be able to access them for a given period. If you have to use the funds, most banks will allow you to do so, but then you’ll be charged high fees which may end up deducting all the earnings you may have made.
Therefore, when it comes to choosing between money market accounts and certificates of deposits, you have to ask yourself whether you can afford not to access the funds for a certain period of time, i.e. 6 months, 1 year or more. If you can, CDs are your best option because they can earn you much more than a standard MMA.
If you’d like to have access to the funds for whatever reason, you are better off opening a money market account. These will earn you reasonable APY without charging you hefty fees.
Are Money Market Accounts and Money Market Funds the same thing?
No, they are not. MMA and MMF are two completely different things. Money market accounts are offered by almost all banks. They are also insured up to federal limits by the Federal Deposit Insurance Corp which protects the account holder’s money from any losses that the bank may incur while investing their money. Your money will also be protected in case the bank collapses.
Meanwhile, MMF are mutual funds which invest in low-risk securities like commercial paper and treasury bills. Unlike MMA which are readily available at different banks, you will need to go through a broker to invest in money market funds. MMF are riskier investments whose value can also decline. FDIC does not insure MMF!
If you want to put your money in a secure savings account that earns you high interests while retaining affordable access to your money, then MMA accounts are the perfect fit for you. They offer more APY than a regular savings account, and they are also more liquid than certificates of deposits. You will even get to enjoy check writing privileges that you cannot find with most other saving accounts.
David is a financial expert who graduated from the University of Fordham (Master in Finance) in 2001. He has 10+ years of experience in private equity and wealth management. With strong expertise in senior-level financial planning, personal financial analysis, and mortgages, David knows his way around personal finance. Before working at CCR he used to be a financial analyst at McKinsey.
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