Money market accounts are specialized cash deposit accounts you can open at most major financial institutions. They function similarly to standard checking and savings accounts, but with one major difference. The institution invests the money you put into the account into the financial markets. Usually, banks park these funds in investment vehicles that carry ultra-low risk profiles, so you’re never in danger of losing any of your principal. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This provides further guarantees of your safety as long as your bank with an institution covered by the FDIC.
Personal finance gurus often describe money market accounts as high-interest alternatives to standard savings accounts. However, they come with a few limitations to keep in mind. Like many savings accounts, you’ll face restrictions on how and when you can access the money they contain. Depositors are also usually required to maintain minimum balances. If you can meet the associated terms and conditions, money market accounts can accelerate your earnings thanks to these three inherent features.
1. They Pay Higher Interest
The most obvious way in which money market accounts outperform savings accounts is in the interest they pay. According to the FDIC, money market accounts can deliver interest rates up to twice as high as standard savings accounts. In general, though, you should expect money market accounts to offer a healthy but measured interest rate boost.
Banks are able to pay significantly higher interest rates through money market accounts. This is because they can do more with the money they contain. The funds deposited in savings accounts can only be used for a strict and relatively narrow range of purposes. However, financial institutions have more leeway when it comes to money market accounts. They can invest in government bonds, certificates of deposit, and other safe investments that are not accessible with funds sourced from customer savings accounts.
2. They Usually Have High Balance Requirements
Another way in which money market accounts help you make more money is through their minimum balance requirements. To avoid hefty fees and surcharges, customers must maintain specific daily balances that usually start at $5,000. These minimums can rise to $10,000, $25,000, or even more. Money market accounts with higher minimums usually pay better interest rates.
Thus, they turbocharge your moneymaking potential by paying high interest on a healthy chunk of deposited principal. Your earnings accelerate the more you invest, as interest adds up more quickly on larger sums of money.
3. They’re Designed to Discourage Withdrawals
Money market accounts also come with several terms and conditions designed to prevent you from drawing down your holdings. In addition to minimum daily balance requirements, you’ll also face limits on the number of monthly transactions you can make. Naturally, these limits usually apply only to transactions that would take money out of your account. You’ll be free to deposit money as often as you like. If you exceed the monthly transaction and withdrawal limits, you can be hit with further fees and account charges. These penalties are designed to act as deterrents, as they can effectively nullify your entire month’s worth of interest payments in a single fell swoop.
In other cases, the bank will require you to wait for a specified length of time — usually a few business days — before it releases the funds you request. These policies often coexist on top of withdrawal limits, which usually extend both to the number of monthly transactions you’re permitted as well as the maximum amounts you’re allowed to spend or take out. Either way, these terms and conditions are meant to keep your balance as high as possible, which in turn helps make sure you enjoy the many benefits these accounts can offer.
Money Market Accounts vs. Money Market Mutual Funds: Know the Difference
Many people confuse money market accounts with money market mutual funds. The two financial products have some similarities. They pay modest interest and come with very little risk and focus on investment vehicles that trade in short-term debt-based assets.
However, there are also several key differences you should be aware of. First, the funds you invest in a money market mutual fund are not FDIC-insured. As such, they do not provide the same protections from capital losses that money market accounts deliver. You also cannot access your money on-demand, as mutual funds are usually designated for investment through brokerage accounts that function differently from standard retail checking and savings accounts.
Should You Open a Money Market Account?
Generally, money market accounts are good options for people who have medium-term savings goals. They are a great place to park funds you don’t expect you’ll need in the immediate future since you’ll be able to earn above-average interest with no risk. Conventional wisdom suggests they’re best used to save up for a down payment on a house, a new car, or other major purchases that are a few years down the road.
If you’re in the market for a longer-term growth vehicle, consider options like retirement savings accounts and long-term certificates of deposit. These financial instruments pay out better interest but carry even stricter limits on your ability to access the funds they contain. If your time horizon is longer than a decade, explore these options or speak to a licensed financial advisor.
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