Banking (MP) A number of you guys have inquired about whether money market accounts (MMAs) are a better savings options as opposed to regular savings. I’m glad you asked. Now, to answer any future queries on the subject the answer is “Yes.”
Most financial experts recommend you to open MMAs to park emergency funds, home down payments, or any short-term savings goals. Why? On account of the benefits… FDIC-insured MMAs tend to offer higher interest savings rates compared to regular deposit accounts like savings. This means no risk for your money, and at higher rates makes MMAs a superior place to stash your cash.
Now, let’s explore the what, why and when MMAs are a better option…
What are Money Market Accounts?
A money market account (MMA) or money market deposit account (MMDA) is an account that pays interest based upon current interest rates in money markets. Typically, around 2%. The main distinction between regular savings accounts and money market accounts is that MMAs pay higher interest and require high minimum balances to avoid paying fees. Minimum balance requirements may mean $1000 – $2500, and these accounts only allow three to six withdrawals monthly. Another difference is, unlike many checking accounts, money market accounts will only allow you to write three checks per month. See the difference between an MMA and Savings Accounts.
Why use Money Market Accounts?
Most financial advisers recommend setting aside three to six months worth of expenses in an emergency fund. If your monthly expenses are about $5,000, that means you have to keep between $15,000 to $25,000 available if you become disabled, miss work or lose your job. Money market accounts are a great place to park this money and, any short-term savings such as a house down payment, automobiles, vacations.
When not to use Money Market Accounts?
MMAs carry some conditions and restrictions that fluctuate from institution to institution. In general, you are restricted to a set number of transactions monthly (about six total, including three checks), and again you must keep a high minimum balance (often $1,000 or more). These restrictions make MMAs less practical than everyday checking accounts normally used to pay bills. Even compared to savings accounts, which has their own transaction limits, minimum balance, and lower rates — the MMA is generally a better option.
What are Money Market Funds?
It is essential to know that “Money Markets” can refer to two entirely different financial products. A money market mutual fund invests in safe, short-term securities and passes the income along to investors. The aim is to earn interest for shareholders while keeping a net asset value (NAV) of $1 per share. Investors can buy shares of money market funds through mutual funds, brokerage firms, and banks.
See the “Money Market Alternative” at WSJ for more clarity on the difference between MMFs and MMAs.
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