Savings accounts offer an easy way to create an emergency fund or to save up to buy a new car or make a down payment on a house. But which type of savings account should you choose? One of the options is a money market account.
At Addition Financial, our members and prospective members sometimes ask, what is a money market account? Since it’s a common question, we’ve created this comprehensive guide to help you understand money market accounts and decide if you should open one.
Let’s start with an explanation of what a money market account is. Simply stated, a money market account is a type of savings account. In many cases, money market accounts pay a higher annual percentage yield (APY) than traditional savings accounts. The APY may be paid as an interest rate or (in the case of a credit union) as dividends.
Saving money in a money market account is beneficial because the higher interest rate and/or dividends can help your money grow more quickly than it would in a regular savings account. If you keep your money in a personal money market account, you can earn a higher-than-average rate of return while still keeping your money liquid and accessible.
Before we get into the details about how money market accounts work, there’s a common misconception that we need to address. If you have a 401(k) or IRA, you may have money invested in a money market fund. That’s not the same thing as a money market account.
Money market funds are a type of mutual fund that invests in near-term instruments that are highly liquid, including things like U.S. Treasury bonds, cash and cash equivalent securities. They’re more liquid than other investments but there is the potential to lose money, as is the case with any investment. A money market account is a savings account, not an investment.
Before opening a money market account, it’s essential to know how they work. In many ways, they are like a regular savings account.
When you deposit money into a money market account, you’ll start earning dividends or interest immediately provided you meet the minimum balance requirement. Interest is compounded daily in most cases, and credited to your account on a monthly basis.
The money in your money market account is insured by the National Credit Union Association (NCUA) or the Federal Deposit Insurance Corporation (FDIC) up to $250,000. This protection makes money market accounts a safe option for things like your emergency savings fund.
Money market deposits are liquid and may be accessed at any time. There may be some limitations, which we’ll talk about in the next section.
Money market accounts have a lot in common with traditional savings accounts, but there are a few important differences that we need to point out:
Money market accounts typically pay a more competitive interest rate than traditional savings accounts. They may be up to 10 times as high, which means you can take advantage of compound interest to grow your savings.
Money market accounts sometimes come with minimum deposit requirements, and that’s usually not the case for a traditional savings account. There are exceptions; Addition Financial’s insured money market account does not have a minimum deposit requirement.
Money market accounts usually have a minimum balance requirement to earn dividends or interest. The minimum balance requirement to earn dividends for our money market account is $1,000; other financial institutions may offer accounts with higher minimum balance requirements.
A money market account may operate like a checking account in some cases. Some financial institutions provide checks and a debit card, something that a regular savings account won’t provide.
It’s typical for financial institutions to put limits on money market account transactions, especially for checks and other payments. For example, our money market account limits transactions by check, ACH, debit card, overdraft protection or by phone with a team member. We allow unlimited withdrawals and transfers if you use an ATM, online banking, mobile banking or our automated telephone system.
For many people, the higher interest rates or dividends provided by a money market account are enough to offset the limitations.
Here are some important pros and cons of keeping your money in a money market account. We suggest reviewing them before opening an account.
We suggest reading the fine print before you choose an account to make sure there aren’t any hidden fees or requirements that you dislike.
Now, let’s talk about the things you should look for when you’re shopping for a money market account.
The first thing to do is to verify that the financial institutions whose money market accounts you’re considering are insured with either the NCUA or the FDIC. While most credit unions and banks display this information on their websites, it’s still a good idea to verify.
You can use search tools provided by the NCUA or FDIC to look up financial institutions and confirm their coverage. That way, you won’t need to worry about losing your money.
Account requirements may have some similarities between financial institutions, but you shouldn’t assume you know what the requirements and limitations are. Some of the things to review include the following:
It’s important to read the fine print about the APY of any market market accounts you’re considering. Look at the interest rate or dividend rate and compare them to other accounts.
You should read the fine print to learn if the rate is variable, which it probably is. That way, you’ll know whether the amount you earn will fluctuate over time.
Some money market accounts may not have a monthly account fee, but some do. You should read through the account description and any fine print to make sure there aren’t any hidden fees.
Keep in mind that some accounts may waive the monthly fee if your balance exceeds a certain threshold. You’ll need to remember that if you need to withdraw funds.
Finally, we suggest looking at the features of each money market account that you’re researching. Here are two of the most important features to look for:
You may not need these features, but if you want to be able to pay for purchases out of your money market account, we suggest looking for an account at a financial institution that offers both, as our insured money market account does.
Opening a money market account is a good way to save money while earning a higher-than-average interest rate on your balance. We hope you’ll use our guide to decide whether a money market account is right for you.
Are you looking for a money market account that has flexible features like checking and a debit card? Addition Financial is here to help! Click here to read more about our insured money market account and open your account today.