If you store your money in a bank, then you most likely have a checking and/or a savings account.
One lets you use your money whenever you want, while the other pays you interest on your emergency fund.
But those aren’t the only types of accounts your bank offers.
Among the many account offerings you can find at the bank, a money market account is just a step above these two types of accounts in complexity.
Perhaps you’ve heard of money market accounts before, but you’ve never understood exactly what they are.
On the surface, they look like a hybrid between a checking account and a savings account. However, their features extend beyond that.
Money Market Accounts
Money market accounts are similar to the two basic types of bank accounts, but with one fundamental difference (at least compared to the savings account): what the bank can do with your money.
When you put money into a checking account, the bank simply holds it for you. For savings accounts, the bank can only lend that money to others in the form of cash.
But with money market accounts, the bank can invest your money.
They’re limited to only the lowest-risk of investments, such as government bonds or Certificates of Deposit.
This fundamental difference gives money market accounts slightly different characteristics than checking or savings accounts.
What the bank can do with your money shouldn’t concern you too much, as all three of these account types are FDIC-insured.
Still, it never hurts to know what’s going on with your money!
Money Market Vs. Savings
Money market accounts are often compared to savings accounts, and for good reason.
For one, you can only withdraw from both types of accounts 6 times a month. This is federal law, so it won’t vary from bank to bank.
But in exchange for these limits, the bank pays you interest on both of these accounts.
However…
Interest Rates
Money market interest rates are much higher than savings interest rates.
This goes back to the investment nature of money market accounts. Since the bank earns a higher return on your money market deposits from investing it vs. lending it, they can afford to pay you a more interest.
Minimum Deposits
So money market accounts and savings accounts have the same withdrawal limit, but money market accounts get better interest rates.
If you’re expecting money market accounts to lag in another area, you’d be right on the money.
Savings accounts typically have low or no minimum deposits or minimum balances. However, money market accounts commonly require you to deposit at least $1,000 and maintain that amount as long as you have the account open.
Check-Writing
Unlike savings accounts, you can write checks against your money market account.
You can’t write as many checks against your money market account as you could against your checking account, but the opportunity is there for your convenience.
When you open a money market account, they also issue you a debit card for more convenient access to your money market cash.
Money Market Vs. Checking
Money market accounts are not as similar to checking accounts as they are to savings accounts. They really do not have much in common beyond one thing.
Check-Writing
As you already know, both of these accounts give you checks.
It’s just that checking accounts let you write as many as you want, while money market accounts severely limit check-writing ability.
Interest
Most checking accounts don’t yield you any interest.
Yes, there are some high-interest checking accounts; however, you typically need to fulfill a bunch of requirements to get the interest rate.
Money markets simply require a minimum balance to take full advantage of their interest rate.
And even so, money market interest rates are still way higher than the rates on high-interest checking accounts.
Money Market Vs. CD
Certificates of Deposit (CDs for short) are a less common banking product. They have some advantages over money market accounts, but fall behind in other areas.
Interest Rates
CDs have the highest interest rate among the types of accounts we’re discussing.
Money market accounts might pay you more interest than savings accounts, but CDs dwarf most money market interest rates.
But as you’d expect, it comes with a catch…
Access To Your Money
The reason banks can offer you such a great rate on CDs is because CDs are what’s known as a “time deposits”.
Once you put money into a CD, you’re not allowed to touch the money for however long the term of your CD is.
In exchange for your inconvenience, banks offer higher rates on these products than on money market accounts.
To contrast, money market accounts do give you limited withdrawals and other transactions at the expense of a less interest.
Why Should You Open One?
Do you enjoy making more money on your deposits, but don’t want to put that money at risk?
Well then, you might be the perfect candidate for a money market account.
By combining all the best features of savings accounts, checking accounts, and CDs, money market accounts yield you more interest without risking it all.
Your Goals
Savings accounts are good for short-term goals because of their low or nonexistent minimum deposits.
Interest on savings doesn’t matter as much due to the low rate, so interest isn’t a huge concern with these types of accounts.
On the other hand, money market accounts are better suited for your medium-term goals. These goals aren’t half your lifetime away, but they’re no present concern.
Money markets are good for these types of goals because of their features. A higher interest rate means you’ll make a decent chunk of money on your money; this can help you make enough money to fund a large purchase a few years down the line (such as a house).
But the minimum balance requirements also help you save for medium-term goals because they incentivize you to leave a large amount of money in the account.
Think about it: if you’re looking to make a large purchase, you need a large amount of money. Banks nudge you towards that with the high minimum balance requirements.
Accessibility
Perhaps you need to save for those larger goals, but you’d still like to retain some level of access to your money in the case that your emergency fund won’t cover an unexpected event.
This is another reason to open a money market account.
Access is limited to a few transactions a month; you hopefully won’t have enough emergencies to warrant more than one or two withdrawals, but if something happens, your cash is available to you.
How To Open A Money Market Account
Opening a money market account is similar to opening any other bank accounts. Here’s what to do in order to get the best bang for your money market buck.
Browse
Any time you want to open a new account, take some time to see what’s on the market.
Just because your checking and savings accounts are with “X” bank, doesn’t mean you have to open a money market account with them.
Money market accounts aren’t the same everywhere; depending on the bank, they come with different interest rates and other features.
Make sure to not only consider the interest rate, but everything else about the money market accounts
- Features
- Accessibility
- Customer service
An up front time investment could make you tons of extra interest (and save you plenty of money market headache) in the long run. Make sure you choose the account that most closely suits your needs.
Gather Your Deposit Money
As you now know, money market accounts come with a hefty minimum deposit and minimum balance.
Make sure you have enough money to comfortably cover theses requirements before you commit to a money market account.
You don’t want to be nickel and dimed with fees later on if your balance drops below the required minimum.
If you aren’t confident you can maintain the minimum balance on your favored money market account, you might have to look elsewhere. Higher interest isn’t worth it if you’re losing that interest plus more to fees.
Transfer The Money
So you’ve found a money market account that has a solid interest rate, the features you want, and an acceptable minimum balance?
Good! Now it’s time to put your money in there.
Just quickly set up your transfer online and check to make sure the money deposits.
A Good Hybrid
Banks offer a vast array of financial products to suit their customers’ needs. You have
- Checking for normal expenses
- Savings for short-term/emergency fund
- CDs for long-term save investments
- And now, you have money market accounts
Money market accounts overall provide a good compromise between the accessibility of checking accounts and the higher interest of less-accessible bank products (like CDs) while acting similarly to a savings account (albeit with a higher minimum deposit).
If you’re all about making more money with less risk, a money market account might be for you!