How Do Money Market Accounts Work?
A money market account is a form of a savings account offered by most banks, credit unions, and financial institutions, but, like other types of savings accounts, not all money market accounts are the same.
While similar to a savings account, money market accounts usually have variable interest rates and are insured by the federal government by either the Federal Deposit Insurance Corp (FDIC) or National Credit Union Administration (NCUA). A money market account differs from a savings account as it offers more forms of withdrawals, but it can also come with more restrictions.
Not Your Ordinary Savings Account
A money market account generally offers a higher interest rate, since the minimum required balance is also higher. It allows withdrawals, like a normal savings account, through an ATM and debit card transactions, but also offers checks like a checking account. The total amount of monthly withdrawals and transfers is often limited to six or fewer; this doesn’t include ATM transactions, though. Some money market accounts have even more restrictions in the forms of maintenance fees, a greater minimum balance, or other rules for the amounts of withdrawals.
Why do Banks Offer Them?
Banks offer money market accounts as a way to offer more products to their customers, while the interest rate is a bank’s way of thanking you for allowing them to invest your deposit. Banks and financial institutions take a low-risk approach when investing your deposit, typically in certificates of deposit or government securities. It’s important to note the difference between money market accounts and money market funds. Money market funds are investments in the short-term debt market and are not backed by the FDIC. It’s also not as easy to withdraw your money from a money market mutual fund.
What Are the Benefits?
Customers can benefit from a money market account’s higher interest rate, but the restrictions make them less accessible than a checking account, but more accessible than bonds. Many financial advisors recommend having six months of savings for an emergency, like loss of a job, and a money market account is a good place to stash it. Conservative investors may use a money market account to get a guaranteed rate of return that offers low risk. It is important to search for the institutions that offer you the best interest rates; a money market account that offers a higher rate than an ordinary savings account is a good place to hold your rainy-day fund.