We all need to have some money that’s accessible, whether it’s money to pay for regular expenses or an emergency fund to help us when we don’t have enough money coming in from jobs or other income sources. But what type of account offers the most benefits while still allowing us to access our money when we need it?
Addition Financial members often wonder which savings account is best suited to their needs, and we sometimes recommend a money market savings account as an option. With that in mind, here’s our overview of money market accounts with five benefits of a money market account to keep in mind as you choose the account that’s right for you.
What is a Money Market Savings Account?
A money market account is a type of high-yield savings account that offers a higher interest rate (or dividend rate if your account is at a credit union) than a traditional savings account. In most cases, you can expect an Annual Percentage Yield (APY) that’s many times higher than a typical savings account. That means your money will grow far more quickly than it would in a traditional savings or checking account.
We should note here that money market mutual funds are not the same as money market savings accounts. A money market fund is an investment vehicle that’s typically offered by a fund company or brokerage firm, while money market savings accounts are offered by a financial institution such as a credit union or bank. You may have both a money market mutual fund and a money market savings account.
How Does the Interest Rate for a Money Market Savings Account Compare to Other Types of Savings Accounts?
One of the most important differences between a traditional savings account and a money market account is that the latter has higher interest and dividend rates than the former. What you need to know is that there are sometimes requirements to be met to earn the highest APY on a money market account.
The average APY for a traditional savings account is 0.23% as of January 2024. The average APY for a money market account is more than twice as high at 0.56%, but you can earn far more than that if you meet the requirements.
In most cases, you’ll need to maintain a minimum balance to earn interest or dividends on a money market account. For example, the top rate in January 2024 for accounts requiring a minimum balance of $25,000 is 5.13%. That’s 20 times as much as a traditional savings account and almost 10 times the average for money market accounts.
Some financial institutions don’t pay dividends or interest at all if your account falls below a specified balance. At Addition Financial, we keep our money market account requirements minimal and pay dividends on any balance above $1,000.
5 Benefits of Having a Money Market Savings Account
Saving money is easy when you have a money market account because the higher dividend or interest rates will allow your money to grow, so you can get more from your savings. Here are five benefits of money market savings accounts to keep in mind.
#1: Higher Interest and Dividend Rates
As we’ve already noted, money market savings accounts typically pay a higher APY, whether it’s in the form of an interest rate or dividends, than traditional savings accounts. There may be requirements such as a minimum balance for the highest rates. Some accounts offer tiered rates that increase as your balance grows.
Many people choose to keep their emergency savings in a money market account because these accounts offer the most growth potential while still keeping their savings accessible. Said another way, money market accounts combine the higher returns of an investment with the liquidity of a traditional savings account.
#2: Liquidity
Speaking of accessibility, liquidity is an important benefit of a money market savings account. We’re big believers in investing, but many investment vehicles don’t offer the same kind of accessibility as money market accounts.
Many money market accounts, including the Addition Financial Money Market and Growth Plus Money Market accounts, provide account holders with easy ways to access their money when they need it. If you have an emergency or unexpected expense, you’ll be able to use your savings without jumping through hoops.
#3: Debit Card and ATM Transactions
A feature of money market accounts that many people are unaware of is that many of them come with a debit card. With a debit card, it’s easy to use the funds from your money market account to make purchases or withdraw cash at any time from an ATM.
You should keep in mind that there may be limitations on the number of debit card transactions you make each month. We’ll talk more about that in the next section.
#4: Checking Privileges
Some money market savings accounts come with checking privileges as well as ATM card privileges. It’s undeniably convenient to be able to write a check against your balance, particularly when you’re using a money market account as your emergency fund.
Here again, there may be some limitations on the number of checks you can write against your money market savings account each month. Some financial institutions have a combined limit for purchases, checks, ACH transfers and other transactions, so be sure to read the account specifications carefully.
#5: NCUA or FDIC Insurance
It’s natural to be concerned about the safety of your money when you entrust it to a financial institution. One significant benefit of choosing a money market savings account is that these accounts are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) up to $250,000 per account holder.
Insurance is not available if you put your money into a mutual fund or another investment vehicle such as an annuity. With a money market savings account, you’ll have the peace of mind of knowing your money is safe and protected.
Are There Any Restrictions or Limitations with a Money Market Savings Account?
Now that we’ve reviewed the benefits of choosing a money market savings account, let’s talk about some of the restrictions and limitations that come with these accounts. These aren’t disadvantages, but they are things you should know about because they may impact how and when you can access the funds in your account.
Minimum Balance Requirements
One of the most common requirements that comes with a money market savings account is a minimum balance requirement to earn interest or dividends. On the most basic level, you may need to maintain a minimum balance to earn any interest or dividends. For example, our Addition Financial Money Market account requires a minimum balance of $1,000 to earn dividends.
If you choose our Growth Plus Money Market account, you’ll get access to tiered dividend rates based on your balance. For balances between $1,000 and $10,000, you’ll earn an APY of 0.05%. As soon as your balance goes above $10,000, your APY will increase to 2.50%. For balances over $100,000, the APY increases to 3% and maxes out at 4% for balances more than $1,000,000.
You should make sure you understand the balance requirements and rates before you open any money market account. It’s also common for there to be a minimum deposit requirement.
Transaction Limitations
It’s common for money market savings accounts to come with limits in terms of how (and how often) you may access the funds in your account. We’ll use our Money Market account as an example.
The most common limit is on the number of transactions each month. For the purposes of this example, deposits and withdrawals are not considered to be transactions. Both of our money market accounts offer unlimited withdrawals and deposits. The transactions that are limited include the following:
- Debit card purchases
- Checks
- Overdraft protection transfers
- ACH transactions
- Phone transactions with an Addition Financial team member
Both our Money Market and Growth Plus Money Market accounts limit the above transactions to six per month. There is no limit on deposits or transfers made via mobile or online banking or at an ATM.
Variable Interest Rates
This last item isn’t really a limitation but it is something you should know. Money market accounts have variable interest rates that may change from day to day. This reality makes money market accounts a less predictable option than a Certificate of Deposit (CD) that has a fixed interest rate.
The upside is that your money will remain liquid and accessible and that wouldn’t be the case if you opted for a CD. You’ll need to weigh your options to make sure a money market account is right for you.
Should You Open a Money Market Account?
Choosing a deposit account for your savings requires careful thought and consideration. With a money market savings account, you’ll get the five benefits we’ve listed here. Most importantly, you’ll retain access to your savings while still earning a higher-than-average APY if you meet the minimum balance requirements.
Are you looking for a money market account that pays generous dividends and offers maximum flexibility? Addition Financial is here to help! Click here to learn about our money market accounts and become a member today!
Posted on Feb 16, 2024
Topics:
