What Is A Money Market Account? [Definition]

Money market accounts combine some of the best features of checking and savings accounts.

Typically, they come with a debit card or checks that allow limited transactions in a month.

Even though someone with a money market account enjoys competitive rates, they have a higher minimum balance as compared to savings accounts. It’s important to take into consideration these factors before settling on a money market account.

At credit unions, money market accounts are insured by the National Credit Union Administration and the Federal Deposit Insurance Corp (FDIC) at the banks. This means that even if your service provider goes out of business, your money is still safe.

How Does Money Market Account Work?

Just like savings accounts, money market accounts allow you to withdraw your money at any time. However, the withdrawals are limited to a certain number per month. A penalty fee is incurred if you don’t maintain the set minimum balance in your money market account. There is also a penalty for withdrawing in excess of the maximum allowed amount per month. Before settling on a money market account, check out for:

  • Minimum balance required
  • Interest rates
  • Service charges and fees on the account.

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Once you open and deposit money in your money market account, the bank uses it to fund loans taken by other people. The interest rate on the loan is usually higher than the amount the bank pays you and this is how they get their cut – by selling money! The difference is what helps them stay in business.

Advantages of Money Market Accounts

Competitive yield: Since the interest earned is compounded on a daily basis, there’s a guarantee that you get t to enjoy the best interest rates compared to savings accounts.

Insured deposits: Money market accounts are a safe place to keep large amounts of money as the FDIC insures up to $250,000 per individual.

Accessibility: You are free to withdraw your cash at any time, which makes it ideal for safeguarding emergency money.

Disadvantages of Money Market Accounts

High minimum balances: The account requires a large amount of deposit and minimum balance. Failure to maintain the balance results in a monthly fee which eats into your returns

Transaction limits: Even though you can access your money at any time, by law, you can’t withdraw more than six times per month. Some banks even have it at three times per month, making it less flexible compared to checking accounts where one can withdraw on a daily basis.

Introductory interest rates: If a given interest rate seems too good to be true, confirm with your service provider that it’s not just an introductory promotional interest rate that won’t last.

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How does the Money Market Account Compare with Other Accounts?

Money Market vs Checking

Even though MMA offers the check-writing option, it’s not designed to be operated like a checking account.  MMA limit withdrawals to as few as six per month, failure to which attracts a financial penalty. MMA requires you to maintain a large amount f money as the minimum balance otherwise you risk incurring a financial penalty which further eats into your returns. Money market accounts are best used as an investment portfolio whereas checkings are best used as flexible liquid accounts.

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Money Market vs Savings

There are two things that MMA and savings accounts have in common: they are both aimed at helping you save and they both offer interests. However, while MMA allows you to get checks, this tool isn’t available in the savings accounts. Generally, a MMA requires you to pack a large amount of money as compared to savings accounts.

Money Market vs Certificates of Deposit

While CDs could earn you more interest than MMA, you better go for MMA if you are looking at having more liquid cash.

If you can’t decide on either of the two, evaluate your goals before settling on one of them

Money Market Account vs Money Market Fund

Even though the two have sort of a similar name, they are very different from each other. One of the distinctive features that stands out is the fact that money market funds are not insured by the FDIC hence should the market experience any changes, you could lose your principal. Money market funds are more of a parking spot for investors looking to have easy access to their money. Money market funds involve buying of shares at a mutual fund company, a bank or a brokerage.

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Top Three Alternatives to Money Market Accounts

While money market accounts can be an ideal parking for your surplus cash, there are other worthy alternatives that could offer better yields and more ideal terms depending on your needs. These alternatives are based on whether you’d like to manage your funds by yourself or look for a service rep, penalties, accessibility, and interests received.

1.Treasury Bonds

Treasury bonds are debt securities that have a fixed interest rate, with most of them maturing after 10 years or more. They offer tax benefits and investors receive interest payments semi-annually. Its risk levels are comparable to those of money market funds. Once bought, the investor is exempted from state income tax but the interest payments received are subject to federal income tax.

 2.High Yield Savings Accounts

If a Yield savings account is insured by the Federal Deposit Insurance Corp., there is a possibility of it providing equal or greater yields than those of money market funds. generally, savings accounts have a minimum allowable balance and deposit. In some instances, savings accounts are subjected to a fixed number of withdrawals per year, failure to which attracts financial penalties.

3. Extra Mortgage Payments

This may not be a traditional investment, but paying extra on your mortgage could yield more or equal amounts of money as compared to savings accounts, treasury bonds or money market funds. An extra payment on your mortgage results in the principal amount of your loan, earning you an amount equal to the interest rate applied on your mortgage.

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