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:
- These accounts are not considered “transaction” accounts and thus have different rules than checking and/or regular savings accounts
- There are oftentimes minimum balance requirements on the accounts
- Account holders are only allowed six withdrawal transactions per month
- 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)
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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.
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.