Before you choose to invest in a money market account, there are a few vital things that you need to know. Here are the eight points that every saver needs to know about money market accounts.
Money Market Accounts are Federally Insured
One of the biggest advantages of money market accounts is that the principal you invest is guaranteed by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank or credit union fails or the markets crash, you won’t lose your savings. The FDIC covers money market accounts for up to $250,000 per account holder, per bank or credit union, or up to $500,000 per bank or credit union for joint accounts.
This is a big distinction from money market mutual funds (MMMF), which are not federally insured at all, leaving a huge risk of losing your initial investment as well as all the interest you earn along the way.
Money Market Accounts are Liquid Assets
Unlike savings bonds or CDs, you can withdraw money from your money market account whenever you’d like. They aren’t term deposits, so you don’t have to wait until the fund matures to be able to take out money. In contrast, if you withdraw money from a CD before the account matures, you’ll have to pay a certain number of months interest as a fine, or even end up losing some of your principal as a punishment. With a money market account, if you need to get to your cash, you do so at will, without losing any of your interest or sacrificing the principal.
Funds in Money Market Accounts are Easily Accessible
When you put money into a money market account, it's easy to withdraw it whenever you need to. You get a checkbook and/or a debit card so that it's easy to take out money when necessary. This means that if you need to draw on your savings to make a big payment, like paying medical bills or buying a car, you can do so without having to schedule an appointment at the bank or credit union, or plan a withdrawal in advance.
Money Market Account Withdrawals are Restricted
Although the funds in money market accounts are easily accessible and liquid, you still can't treat them like a checking account. Federal law limits the amount of withdrawals you can make each month from savings funds like money market accounts, to a max of six per month.
If you go above your permitted number of withdrawals, you’ll have to pay a fine, which is typically $10-$20 per withdrawal. If you carry on making extra withdrawals, federal law requires the bank or credit union to revoke your transfer privileges, close your account, or move your money to a regular checking account instead.
However, these restrictions only apply to certain transfer and electronic payments:
- Pre-authorized transfers, like overdraft protection payments
- Telephone, wire, and electronic transfers
- ACH transactions
- Checks or debit card payments to third parties
If you want to make a withdrawal at an ATM, in person at your bank or credit union, or through the mail, you can make as many as you want each month.
Your Money Market Account Balance is Very Important
As well as restrictions on the number of transfers and electronic payments that you can make every month, money market accounts have another restriction in the form of a minimum balance. Every money market account requires you to make a minimum deposit in order to open the account, and also to keep your balance at a certain minimum level.
It's up to each bank or credit union to set the minimum balance, so this can vary widely. You might need to keep a minimum balance of $1,000, or it could be as high as $10,000, or even more. If your money market account balance goes below the minimum amount, you'll get fined, and that fine could be enough to completely cancel out any benefit you get from a higher interest rate.
Money Market Account Interest Rates Can Vary
One of the main attractions of a money market account is that you can earn higher interest on your savings, but that comes with a big warning. Unlike CDs, the interest rates on money market accounts are not fixed.
Banks and credit unions use your funds to invest in short-term liquid assets on the stock market, and then they share the interest with you. So, although you aren't investing in the stock market directly, and your principal investment is guaranteed, the amount of interest you can earn depends on the investment choices of the bank or credit union and the performance of the stock market.
This can be a good thing, because it means that you benefit from rising interest rates and a buoyant stock market, without risking losing your original savings funds. However, it's important to bear in mind that although you might invest your money into a money market account with a higher interest rate, that rate could drop as well as rise.
Compound Interest Methods Affect Money Market Accounts
When it comes to money market accounts, it’s important to check whether interest is compounded daily, monthly, yearly, or at some other frequency, especially if you have a large balance. When interest is compounded daily, you’ll usually end up with a higher annual return than if interest is compounded monthly. That’s because the interest is added to your total investment each day, so it can earn more interest the next day, and then the interest from both days will earn even more interest on the day after that, etc.
If you're confused by compound interest and you just want to find the money market account that delivers the biggest total interest every year, you should compare the Annual Percentage Yield or APY. The APY takes into account the frequency of compounding interest on the account and shows you the bottom line amount that you can hope to make each year.
You Can Keep Adding to Your Money Market Account
While there are restrictions on the minimum balance that you need for a money market account, and limits to the number of transfers and electronic payments that you can make, there's no cap on the amount of money that you can deposit in a money market account. You can add small amounts every day, every week, or every month, according to your convenience. This way, even if you can only make a small deposit when you open your account, you can keep adding to it so that it grows even faster while enjoying higher interest rates.
MMAs Can Be A Good Choice for Your Money
Money market accounts might sound confusing, but once you understand these eight major features, you’ll be well placed to decide whether or not they are a good choice for your funds. With a combination of features of regular savings accounts and CDs, money market accounts can be the ideal savings vehicle for certain situations.