Money Market Consumer Advice

Ahh – the allure of the money market! Easy access. No complicated terms. Competitive rates. Check-writing capabilities. And did someone say I could have a card to go with that value meal? 

While the product has gained steam in the past few years (and is especially popular with younger generations who prefer to keep their funds ready to spend at a moment’s notice), the sophisticated consumer should understand everything that comes with the almighty money market. 

1- While money markets are liquid (not defined by a term like certificates of deposits), they are restricted by six withdrawals per month. This is defined by banking law – so don’t go shouting at your banker or broker for this one. But if you plan on using the account for much transacting (other than depositing), you might want to rethink. (You could also incur a few fees by going over your withdrawal limit.)

2-Although we seem to be stuck in the vortex of eternally-low interest rates, and the difference between an interest checking account and a five-year certificate of deposit (CD) ranges from 100 to 250 basis points, don’t get caught watching the yield curve. Often these money markets draw you in with a teaser rate, then quickly normalize within the first six months. Keep your eye on the published rate and any particular index if appropriate. 

3-Take a close look at those sneaky balance requirements. Not only may this affect your rate, but you could get zapped some hefty service charge fees. Before you open the account, ask politely, “What fees might I be assessed?” Of course, the service charges will all be neatly disclosed to you in a thick wad of papers that you won’t want to take the time to read. So just ask. This is really important. Case in point: You just deposited $25,000 in a money market. After the first month, you’ve earned $10.27 based on the whopping .50% interest rate. Next month you purchase travel tickets for a Kenyan Safari Travel Package. The ole’ Money Market takes a hit after you withdraw $10,000. But wait. What’s that debit showing on your E-statement? $25? A call to my banker informs me that my balance fell below $20,000. Therefore, a service charge of $25 was assessed. Geez – it’ll take a couple months of interest to make that up. Wish I would’ve known. Or asked.

4-Money markets have the beauty of coming in many shapes and sizes; an FDIC-insured product with coverage up to $250,000, a mutual fund with potential dividend action, or even a variable-rate IRA with the possibility of automatic Required Minimum Distributions. Huh? So what’s the disadvantage? Money Markets have the distinct possibilities of becoming very complicated. Too complicated. If you don’t understand the product, ask your banker or broker to explain it again – in fifth-grader speak. If you still don’t understand, don’t purchase. Never invest in anything you can’t grasp. 

Don’t get me wrong – money markets have great advantages- namely liquidity and the potential for great return.  But like any smart and savvy consumer, one should ask questions and understand your risks before purchasing.