There are different ways to gain interest on your money. Investments are not the only possible ways to make money. We all know about regular bank accounts and saving accounts. With so many different types of banking accounts out there, there are quite a few ways to earn interest on your money. Money market accounts are one of them and in this post we will look through it. These are one of the most popular savings options, and if you aren’t familiar with their features, it’s probably time to learn more. Because who doesn’t want to earn while saving? Especially if you are not planning about long term MMAs are best for short-term financial goals rather than long-term financial planning, like retirement.
What is a Money Market Account?
A money market account is an interest-bearing account at a bank or credit union—not to be confused with a money market mutual fund. Sometimes referred to as money market deposit accounts (MMDA), money market accounts (MMA) have some features not found in other types of accounts. Most money market accounts pay a higher interest rate than regular passbook savings accounts and often include checkwriting and debit card privileges. You can make payments through this account. They also come with restrictions that make them less flexible than a regular checking account. They are important for calculating tangible net worth. You can make unlimited monthly deposits however your withdrawals will be limited.
Money Market Account Interest
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!
Money market accounts pay yearly, monthly, or daily compound interests and each of the time periods has different returns. Average bank savings accounts pay around 0.41% APY, while money market accounts pay an average of 0.64% APY. However money market account interests are variable and subject to market conditions. This means your account numbers can go high and down easily. This might sound a little bit risky however if you are patient enough you can get a good return on the money market account. Also you need to be willing to lock your money for a certain amount of time without withdrawing.
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 in 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 money market accounts works in the next section.
Advantages of Money Market Accounts
Higher Interest Rates (APYs): Money market accounts pay a higher rate compared to a standard savings account.
Check-writing: You can write checks to make your regular payments or any other needs.
Debit cards: It is possible to connect your debit card to this account. It gives you flexibility to make your transactions without hustle.
Insurance protection: Your money is backed by The FDIC and NCUA up to $250,000 per depositor, per member bank, and per ownership category. Joint account limits increase protection up to $500,000. We remind you that it is important to choose a member bank.
As we see there are many advantages to using a money market account however before deciding let’s see what are the disadvantages so you can decide if money market accounts are convenient for you.
Disadvantages of Money Market Accounts
Rate fluctuations: APYs on money market accounts aren’t fixed in like other bank account types. It is possible to choose an MMA account with a higher-than-average interest rate, as MMAs have variable rates, there is no guarantee that these rates will be competitive in near future.
Transaction limits: Even though your deposits are unlimited, your withdrawals will be limited to a certain amount within a certain time frame.
Minimum balance requirements: Some banks may ask for a certain minimum amount of balance daily or monthly. This requirement depends on the bank. In general this amount is around $2,500. This amount also may be asked by your bank while you are opening an account.
Fees and costs: There might be fines from your bank if you don’t meet the minimum balance threshold. Also some banks apply excessive transaction fees. Before opening a money market account, please talk to your bank and inform yourself about possible fees or costs that may arise.
Best Ways to Use a Money Market Account
Money market accounts are a great vehicle to use for pursuing both short-term and long-term savings goals. These are alternatives to regular savings accounts with minimum risk to lose your money. They allow you to separate specific money from your everyday bank account to save for the future. Money market accounts are an excellent bank account to use for:
Emergency funds
Wedding expenses
Vacation funds
Tax payments
Home renovation projects
Capital for your startup
Saving for a new car
Retirement savings
Other short-term savings goals
There’s no shortage of uses for a money market account.
Also you have to consider that in some countries, you need to pay tax over interests that you gain through these types of bank accounts. Check the legal side with your accountant before locking your money for months into your money market account. Choose a reliable financial institution or bank with good customer service that is available when you need it. Do your homework to help ensure you end up with the best money market account for your savings and any other banking needs.
