Saving money is not just a necessity, it's an opportunity. It allows us to grow our funds and prepare for the future. A money market account, for many, is an excellent choice to achieve this. It offers the perfect balance of keeping your savings liquid and accessible while still allowing them to grow.
At Addition Financial, we work with our members to help them achieve their savings goals. One way we do that is by providing a money market account that pays generous dividends. If you’re considering opening a money market deposit account, here are eight pros and cons to consider.
What is a money market account?
A money market account is a type of savings account offered by credit unions and banks. While traditional savings accounts offer low interest rates on deposits, money market accounts typically offer competitive interest rates that are significantly higher. According to Forbes, the average money market interest rate is 0.23% with some financial institutions offering rates of 3% or more.
It’s common for credit unions and banks to offer the highest interest rates to those depositors with the highest balances. For example, you might earn 0.25% interest if your balance is less than $10,000 and a higher rate for a balance that goes over that minimum amount.
Some money market accounts require a minimum deposit or a minimum balance to earn interest or dividends. Our money market account at Addition Financial pays dividends on balances over $1,000. Dividends are accrued daily and credited to money market accounts on a monthly basis.
We should note here that there’s a difference between a money market account and a money market mutual fund. The former is a savings account while the latter is an investment account. If you open a money market account at a credit union or bank, your deposit will be insured up to $250,000 by either the NCUA or the FDIC.
How does a money market account work?
Money market accounts work like traditional savings accounts with a few exceptions. Here are a few differences to keep in mind:
- Minimum deposits. Most traditional savings accounts require a low minimum deposit to open an account. Some money market accounts may have a higher minimum deposit requirement.
- Monthly transaction limits. Some financial institutions place limits on how many transactions are permissible each month. For example, you might have a limit of six transactions, including checks and ATM withdrawals. Traditional savings accounts typically do not limit monthly transactions.
- High dividends/interest rates. As we noted above, money market accounts offer more generous dividends and interest rates than traditional savings accounts. Earnings are compounded daily and paid on a monthly basis.
- Minimum balance requirements. Unlike traditional savings accounts, a money market savings account often imposes a minimum balance requirement to earn interest or dividends. At Addition Financial, we pay dividends on money market account balances of $1,000 and over.
The most important commonality between a traditional savings account and a money market account is liquidity. If you want your money market funds to be earning dividends while maintaining liquidity, a money market account is the best solution. Provided that you meet your financial institution’s minimum balance requirements, you can save money and earn a return on it while keeping it accessible if you need to use it.
Once you open a money market account with Addition Financial, your dividends will be compounded daily and credited monthly. There is a limit of six transactions per month via debit card, check, overdraft protection, or on the phone. You may make unlimited withdrawals or transfers via online banking or mobile banking, automated telephone, or at an ATM or branch.
8 Pros and cons of money market accounts
Now that you know what a money market account is and how it works, let’s explore the benefits and risks of opening one. Here are eight pros and cons of a money market account to know.
Pros of a money market account
Here are some of the benefits you’ll reap if you open a money market account.
#1: Competitive APYs
The biggest benefit of opening a money market account is that you’ll earn a higher annual percentage yield (APY) on your deposit than you would with a regular savings account. In some cases, the rate may be five to 10 times as high as it would be with a traditional account.
#2: Check writing privileges
Some money market accounts allow you to write checks against the money in your account even though it’s a savings account and not a checking account. This feature may be useful because if you need to access your funds, you can do so without transferring money to your checking account.
#3: Liquidity
Unlike an investment account, a money market account offers full liquidity. If you need to access your money, you can transfer it to another account, withdraw it from an ATM, or in some cases, write a check against it. There’s no waiting period and no hoops to jump through to use the money you’ve saved.
#4: Insurance for deposits
As we already mentioned, money market account deposits are typically insured by either the NCUA for credit union accounts, or the FDIC for bank accounts. Keep in mind that some financial institutions may not be insured, so it’s always recommended to check before opening an account. Our money market accounts at Addition Financial are insured by the NCUA up to $250,000 per member.
#5: Flexibility
One of the best things about opening a money market account is that it affords the account holder a lot of flexibility. It’s possible to save money, earn a good return on your deposit, and use your money how and when you want to.
Cons of a money market account
Here are some of the potential downsides of opening a money market account.
#1: Variable interest rates
The interest rates on money market accounts are variable. You may have a rate that increases or decreases based on economic conditions, and that may make it difficult to predict the return you’ll earn on your money market deposit.
#2: Minimum deposit requirements
Many financial institutions have a minimum deposit requirement for money market accounts, and in some cases, the minimums may be $5,000 or $10,000 or more. That’s not always the case: Addition Financial’s money market account doesn’t require a minimum deposit.
#3: Minimum Balance Requirements for Interest/Dividends
For some people, a minimum balance requirement may make a money market account less desirable than a traditional savings account. Minimum balance requirements vary. The minimum for our money market account is $1,000.
How do you open a money market account?
Opening a money market account isn’t complicated. We recommend researching the money market requirements at your current financial institution and a few other places before you open an account. If your most important requirement is a high rate of return, you might choose a different account than you would if you wanted to prioritize flexibility or wanted a low minimum balance requirement.
Here are the steps to open a money market account at Addition Financial:
- If you’re not yet a member, the first step is to make sure you meet the membership requirements. You can read about our membership requirements here.
- Become a member by opening a Share Savings Account with a minimum deposit of $5.
- Pay a one-time membership fee of $10.
- Open your money market account.
As a reminder, there is no minimum deposit requirement for our money market account. However, you must have a minimum balance of $1,000 in order to earn dividends on your deposits.
Can you lose your money in a money market account?
One of the most frequent questions people have about money market accounts is whether their money is safe in one. We’ve already talked about the protections available, but here’s a bit more detail.
Most credit unions and banks in the United States offer insurance for deposits. For credit unions such as Addition Financial, the insurance is provided by the National Credit Union Association. Deposits are insured up to $250,000 for each individual account and a member’s share in all joint accounts combined up to $250,000.
Money market accounts at banks have similar protection through the Federal Deposit Insurance Commission.
What this all means is that your deposits in a money market account are protected up to $250,000. Most people have balances lower than that limit, which means that the only way you could lose your money in a money market account is by opening an account at a financial institution that isn’t insured by either the NCUA or the FDIC.
Open a money market account with Addition Financial
Opening a money market account makes it easy to create an emergency fund or save money for a new car or a down payment on a house while still keeping it accessible in the event you need to use it. The eight pros and cons we’ve listed here will help you decide whether a money market account is right for you.
At Addition Financial, we're committed to helping you maximize your financial potential. That's why we offer our exceptional Money Market Account - a perfect blend of growth, flexibility, and liquidity. Plus, take advantage of no minimum deposit and a low, $1,000 minimum balance requirement. Click here to learn about our insured money market account and how you can apply for one today!
Posted on Oct 18, 2023
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