8

What Is a Money Market Account?

There are many different places to put away your monetary savings; under the mattress, in a shoebox, in a home safe, buried in the backyard… or a bank. Most people put their money in a regular old savings account at their bank, either because they don’t know there are better options or because they feel safer having it down the street in that little brick building. If that’s you, you may be missing out on a (now only slightly, but in the past much better) interest rate on your savings, as there is an alternative that acts pretty much just like a regular savings account but gives you a higher return on any money you just have sitting around waiting for use.

A money market account (MMA for short) is a type of savings account that one deposits money into and allows the holding bank/institution to lend and invest the cash in government and corporate securities, giving you (the account owner) back part of the returns. The money you keep in the account is used by the bank to make money, and they pay you a little bit for the privilege to do so. Interest rates on MMA accounts are generally higher than typical savings accounts, and this is for several reasons:

  1. These accounts are not considered “transaction” accounts and thus have different rules than checking and/or regular savings accounts
  2. There are oftentimes minimum balance requirements on the accounts
  3. Account holders are only allowed six withdrawal transactions per month
  4. Banks can charge fees for exceeding the six transactions

Because access to your money is a little more limited than in a typical savings account, many people store there emergency funds and/or long term cash in these type of accounts. It is definitely not the type of account you want to use to keep your daily cash needs in, as the fees you will accrue will eat up any higher interest rate you may be getting. I keep my emergency funds, my car repair funds, and my “taxes due” funds in 3 separate accounts over at ING Direct, who I have been with for years. I don’t need access to this money too often, so the restrictions on the account or the wait time (a few days) to transfer money to my checking account is OK with me. A local bank is currently paying a 0.05% APY interest on their savings account while ING pays me 1.10% APY on my MMA with them — a rather large difference. Money Market Accounts are FDIC-insured just like savings accounts, up to $250,000 per depositor, so you don’t have to worry about losing your money in a bank collapse or any other situation. (Unlike when you keep it under your mattress and your house catches on fire)

If you are holding any long-term money in a regular savings account and not an MM account, you may want to look into moving some of it into one. The interest rates are much better, your money is safe, and you can still access it whenever you need it. Why keep earning a tiny amount of interest when you could be doing a lot better just by moving your money? There are a ton of different MMA available at banks and institutions, so be sure to do your homework, but some of the common ones are ING Direct, Ally, and EverBank. Happy MMA hunting!

(photo credit: alancleaver_2000s)

Be Sociable, Share!


Like this article? Please consider subscribing to my full feed RSS. Or, if you would prefer, you can subscribe by Email and have new posts sent directly to your inbox by entering your email address in the box below. Your email will only be used to deliver a daily email and you can unsubscribe at any time.

Comments (8)

Trackback URL | Comments RSS Feed

  1. Nate says:

    I know that at my bank the money market savings only has a slightly higher interest rate than the regular savings. Although it’s a good idea to move your money to a money market savings, I wouldn’t expect that much more money unless you got $50,000 or more in your savings and then it could start making a real difference.

  2. Randy says:

    Good point, Nate. Banks typically pay interest on Money Market accounts using a tiered rate: higher balance = higher rate. Low balances normally earn a rate comparable to a savings account and may incur a low balance fee.

    David, a few corrections for you. MMA and regular savings are governed by federal Regulation D. Both are “non-transaction” accounts, both have the same transaction restrictions:
    An account owner can make no more than 6 “restricted” or “covered” transactions per month or monthly statement cycle, and those include ACH drafts, transfers to a checking account by phone or online banking, and in the case of a money market account, checks.
    Unlimited transactions include ATM withdrawals, withdrawals done in person, transfers to checking done in person, loan payments at the same bank.

    Furthermore, if account activity exceeds the 6 transaction limit three times in any twelve month period, the bank is required to put a stop to it – return the checks, or close the account, or convert the account to non-interest bearing. Banks that fail to comply with Reg D can face harsh consequences so typically they’ll discourage excess activity by charging a fee for it.

  3. Frank Head says:

    I’ve been moving large sums of money between my bank accounts recently. I’m shuffling funds from my business account to my personal account to my high-yield savings account in an attempt to get each dollar in its proper place.

  4. AlvinEstes says:

    A money market is more or less a mutual fund that attempts to keep its share price at $1. Professional money managers will take your cash and invest it in government t-bills (aka “treasuries”), savings bonds, certificates of deposit, and other safe and conservative short term commercial paper. They then turn around and pay you, the owner of the money market, your portion of the interest earned on those investments.

  5. Nakia Wricks says:

    The interest rates are much better, your money is safe, and you can still access it whenever you need it. Why keep earning a tiny amount of interest when you could be doing a lot better just by moving your money? There are a ton of different MMA available at banks and institutions, so be sure to do your homework,

  6. Total U.S. money market mutual fund assets fell by $5.35 billion to $2.563 trillion for the week that ended Wednesday, the Investment Company Institute said Thursday.

    Assets of the nation’s retail money market mutual funds rose $369 million to $889.88 billion, the Washington-based mutual fund trade group said. Assets of taxable money market funds in the retail category rose $390 million to $702.8 billion. Tax-exempt retail fund assets fell $17 million to $187.08 billion.

  7. Ernest Brown says:

    It is definitely not the type of account you want to use to keep your daily cash needs in, as the fees you will accrue will eat up any higher interest rate you may be getting. I keep my emergency funds, my car repair funds, and my “taxes due” funds in 3 separate accounts over at ING.

  8. shaun says:

    If it’s money that’s truly an emergency fund. (eg you’re not going to touch it unless you have a job loss or something tragic happen). Why not put it into a Roth. I’m not saying you do any crazy type of investing you have plenty of options as to what you invest in and can choose fairly safe funds. But just have it there because the interest will grow tax free and you can remove the principle whenever without penalty if you truly do need it. There are also other benefits with regards to buying your home etc. Better than just having the money in a low interest savings account.

Leave a Reply




If you want a picture to show with your comment, go get a Gravatar.

css.php