(MP) When the time comes to turn up your savings game, money market accounts (MMAs) may provide you a great option. By opening an MMA, what you have is a secure place to park your funds while growing your balance at competitive rates. This is a power move tactic in the money management game of life.
A money market account is a type of savings account offered by banks and credit unions just like regular savings accounts. The difference is that they usually pay higher interest, have higher minimum balance requirements (sometimes $1000-$2500), and only allow three to six withdrawals per month.
What are Money Market Accounts?
These accounts are similar to basic savings accounts. They each restrict depositors to accessing the funds about 6 times or fewer every month. They are both qualify for federal deposit insurance up to the legal maximum (not true when using the similarly named money market fund). However, there are a few elements that make MMDAs uniquely more promising for certain situations.
Money market deposit accounts are a hybrid between a checking and a savings account. They earn a bit more than interest-bearing checking accounts but restrict the number of deposits or withdrawals that can be made each month.
These deposit accounts are offered by banks and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per person, per bank. As long as the balance in the account remains below the insurance limit, every bit of principal and interest earned on the account is 100% guaranteed. (To learn more about how your money is protected by the FDIC, read Nolo’s article FDIC Insurance: How Safe Is Your Money?)
Most safe investments won’t make you rich, but our personal finance blog will point you in the right direction. Remember, the rate of return paid on MMDA’s will vary according to market conditions and the bank’s standard rates, but in today’s market, is usually only a bit higher than standard savings account rates. By and large, they generally pay a bit less than the rate of inflation.
Interest you earn
When you put your money into a money market savings account it earns interest just like in a regular savings account. Interest is money the bank pays you so that they can use your money to fund loans to other people. That doesn’t mean you can’t have your money whenever you want it, though. That’s just how banks make money — by selling money! Basically, it works like this:
- You open a money market account at the bank.
- The bank pays you interest on the money that you deposit and leave on that account.
- The bank then loans that money out to other people, only they charge a slightly higher interest for the loan than what they pay you for your account.
The difference in interest they pay you versus the interest they charge others is part of how they stay in business. We’ll take a look at how the interest on an MMA works:
Tiered interest rates
Most money market accounts offer different rates based on how much money you have already deposited. The bigger your balance, the bigger you can earn in interest. With tiered accounts, your interest rate will increase each time the balance rises to a certain level. Which means as your money grows – your interest rate grows. And if you’ve got a considerable amount of money, to begin with, a money market account outpaces an everyday savings account in terms of yield, quickly. It’s also a great money management incentive to save much more to reach those higher rates.
High minimum deposit requirements
Alongside tiered interest rates, most MMDAs also specify a fairly large minimum deposit requirement to open an account, avoid monthly fees, or perhaps just to earn interest. If you aren’t sure whether or not you are able to meet this limit, try to find banks or credit unions that don’t require it or else investigate a basic savings account.
Check writing abilities
Unlike a basic savings account, money market deposit accounts sometimes offer the option to write checks. Remember that using these checks is still subject to the 6 withdrawals monthly limit, so don’t go crazy writing checks, you will incur a fee. This feature may be useful for people who are using an MMDA in money management areas such as building up an emergency fund, for example, buying a house or that vacation to Paris.
Managing your account
Like a basic savings account, money market accounts let you withdraw your money whenever you want. However, you usually are limited to a certain number of withdrawals each month. Banks will usually charge a fee (typically around $5) if you don’t maintain a certain balance in your money market account. There may also be a fee (typically around $5-10) for every withdrawal in excess of the maximum (usually six) the bank allows each month.
Because of these possible fees, you should always shop around and compare what different banks are offering. Things you should look at include:
- Minimum balance requirements
- Fees and services charges on the account
- Interest rate paid on your balance
With money market accounts you’ll get a small book called a register (like a checkbook register) where you write in your beginning balance (the amount you originally deposit) and all of your future deposits and withdrawals. This tool helps you keep track of how much money you have.
Each month, your bank (or credit union) will send you a statement of your account either in the mail or by e-mail if you prefer. The statement will list all of your transactions as well as any fees charged to your account and interest your money has earned. In order to make sure you didn’t forget to write down any withdrawals and/or deposits (and also to double-check the bank’s activities), you should go through each entry in your register and compare it with the bank statement. They should match up — this process is called reconciling. If they don’t, you’ll need to find your mistake and correct it in your register (unless it is a bank error, but that isn’t very likely).
The only other thing is to remember to make regular deposits into your money market account and sit back and watch your money grow!