Get your finance in order, with wealth management's must-read stories everyday!

What is a Money Market Account

Susan Kelly

Dec 29, 2023

A money market account refers to a deposit account that a person can open at a bank and other financial institutions like credit unions. A money market account functions as a hybrid checking-savings account, providing both the benefits of a savings account and the versatility of a checking account.

Money market accounts include checking account features, which let you use your debit card to make purchases up to a predetermined amount, write checks, and transfer money between accounts. Federal regulations limit money market accounts to six each month, beyond which you must pay a service fee.

The interest rates on these accounts are also higher than regular savings or checking accounts. This makes them an excellent choice for those looking to save for emergencies, a vacation, or other large expenses.

Most banking institutions have minimum deposit requirements for money market accounts. For example, Bank X might mandate you create a bank account with a $20,000 minimum balance. You should also keep that balance every month. You will often be fined a monthly fee if your balance drops below this amount.

How Does a Money Market Account Work

Money market accounts, which are available at financial institutions such as credit unions and banks, provide several appealing characteristics for customers:

  • Access. A money market account, which combines the interest-bearing features of a savings account with the advantages of a bank account, may provide you with check-writing benefits and a debit card.
  • Interest. Money market accounts (MMAs), like savings accounts, earn interest.
  • Insurance. Like a savings or checking account, a money market account is protected by the National Credit Union Association (NCUA) or Federal Deposit Insurance Corporation (FDIC) up to $250,000 per customer, per ownership type.

Money market accounts may appeal to consumers because they provide higher interest rates and more liquidity compared to savings accounts.

Are Money Market Accounts Safe?

Generally, money market accounts (MMAs) are a safe investment. For starters, the Federal Deposit Insurance Corporation (FDIC) insures them. For member firms, the independent agency protects cumulative deposits of up to $250,000 per customer.

If the bank or agency collapses, your aggregate investments, per member firm, will be insured up to $250,000. The fact that money market accounts involve minimal risk is another factor contributing to their relative safety. That's because banks use the funds from the money market accounts to invest in highly liquid, stable, short-term securities like commercial paper, government securities, and certificates of deposit (CDs) that carry low risk. You ultimately receive a higher rate because the bank distributes the profit with you after these assets reach maturity.

Are Online Money Market Accounts Safe

When you open an account with an FDIC member bank, you can be confident that your savings are FDIC-insured up to the highest amount permitted by law.

Most online banks use several standard security measures to give their clients a secure banking environment and reduce risk across all accounts, not only money market risk. Examples are multifactor authentication, firewalls, anti-virus software, and SSL encryption.

Benefits of Money Market Accounts

They offer high-interest rates.

One of the main benefits of money market accounts is that they offer highly competitive interest rates. Some banking institutions currently offer APY as high as 4.55%. As a result, every $1,000 in the money market account is worth $45.50. The FDIC)reports that the typical interest yield on a standard savings account is only 0.35 percent.

They provide full access to your money.

Some financial institutions make it challenging to access your money. For example, certificates of deposit (CDs) demand that you keep your funds locked in the bank account for a specific period. On the other hand, much more liquidity is available with a money market account. You have unlimited access to your money.

A money market account is a low-risk investment.

Unlike other volatile assets and individual stocks, a money market account is a low-risk investment. Interest rates are usually related to the federal funds rate established by Federal Reserve. When the federal authorizes interest rate increases, returns on the money market and savings accounts also increase. Because of this, money market accounts may be an appealing financial choice when interest rates are rising, especially in the context of inflation.

Drawbacks of Money Market Accounts

Returns are lower than other investments.

The goal of investment is to maximize prospective returns. Money market accounts are seen as secure investments, but their returns are sometimes behind those of higher-risk assets. The average annual return on the stock market during the last century has been close to 10%. That does not imply that everything will be easy or that stock returns will be certain.

Minimum Balance Requirements

Many high-yield money market accounts have minimum balance requirements and opening deposit requirements. Fee fees may be assessed if the account holder fails to keep the minimum balance. Consider looking into money market accounts without these requirements if you're just starting to save savings. Once your balance reaches the minimum required to qualify, you can move to a money market account with a higher yield.

Bottom Line

A money market account is a safe investment to keep your cash savings. It may include your emergency fund or cash you're setting aside for other financial objectives. Unlike conventional savings accounts, interest rates are typically higher, and liquidity is not a problem in money market accounts.

Related Stories

Privacy Policy | Terms of Use

© 2023

Contact us at: [email protected]