A money market account is an insured savings account that is offered by banks and credit unions. If you want to save up some money, you might be considering opening a money market account. Compared to savings accounts, you need a greater minimum balance to open the account. The trade-off is a higher Annual Percentage Yield (APY), but recently this has not always been the case.
Recent market conditions have resulted in revised versions of money market accounts. There are a few accounts out there that you can open with $100 or less, but these offer lower APY’s. This has made the earnings of money market accounts similar to that of savings accounts.
Money Market Account: Things to Consider
Depending on your needs, a money market account could be better than a savings account. If you’re considering opening a money market account, here are a few things you need to know.
1. Money market accounts are different to money market funds
Though their names are similar, money market accounts differ from money market funds. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC). If the bank crashes, the FDIC ensures you won’t lose your money.
Money market funds are offered by investment companies and brokerages and not banks. They are more of an investment product and are not FDIC insured. The money is then invested in fixed income securities – like the U.S. Treasury bill.
2. Money market accounts are beneficial to banks
With savings accounts, banks keep a percentage of the money and use the rest to provide loans. Money market accounts are used by banks to provide companies with overnight loans.
These companies return the loan with interest, earning you and the bank some money. In both cases, the bank rewards you with interest for giving them money to loan.
3. Money market accounts don’t always offer high APY’s
MMA’s tended to have higher APY’s than that of savings accounts. Nowadays, many savings accounts have APY’s that outperform them. For example, online bank Ally offers a 1.25% APY on their savings account and only 0.90% APY on their MMA.
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There are still relatively high APY’s around, like the 1.41% offered by UFB Direct. But, to qualify for this interest rate you need a minimum deposit of $5,000. It’s a good deal if you already have a sum of money you want to save, otherwise a savings account would be better.
4. Money market accounts offer liquidity
Money market accounts have high liquidity. Liquidity is the ease of which you can access cash from your accounts and other assets.
With money market accounts, you can write checks and have options like ATM or debit cards.
But, transactions are limited to six each statement cycle. If you need greater access to your money than that, a high-yield checking account is better.
5. Money market accounts are great for saving down-payments
Money market accounts are excellent if you’re saving up on a down-payment to buy property. You’ll earn on interest without risking your money on an uninsured investment.
Unlike with CD accounts, you can access the money when you need. It saves you from having to time your property purchasing with when you can access your savings. You also won’t risk forfeiting a good property deal to the buyer next in line.
Money market accounts have specific benefits over the standard savings account. It works the best if you already have $1,000 or more to save. A money market account is the solution for you if you want easy access to your savings.