There are so many different types of financial products in the market that sometimes it can be difficult understanding the right one for you. Most banks offer the typical checking accounts and savings accounts – and money market accounts.
Very often you will see a rate sheet or board advertising the bank’s current rates on CD’s and money market accounts. The money market rates are higher than the savings account rates, but typically lower than the CD rates. But what exactly is a money market account?
The first thing you may notice about a money market account, after the higher interest rate, is the high minimum balance. Depending on the bank the minimum balance for a money market may be anywhere from $2500 to $10,000. And just because that is the minimum balance on the account doesn’t mean that that is the minimum balance to get that great advertised rate.
Interest rates on money market accounts are typically tiered, the more money you have in the account the higher the yield. So in order to capture the interest rate you are looking for you may have to maintain a significant balance.
Once the money is in this account you have greater liquidity than you would in a savings account. Savings accounts, by law, are restricted in the number of withdraws you may make in a monthly statement cycle. While Federal Regulation D allows six withdrawals from any savings-type accounts, banks typically limit regular savings accounts further. Money Market accounts, however, are usually not limited by banks in this way and are permitted the six withdrawals.
Even more surprising, three of those six withdraws can be by check. Yes, this is a savings vehicle that allows you to write checks. You do not, however, have the ability to use a check card on this account for point of sale purchases, although you may have ATM access.
A money market account gives you a higher yield on your money, gives you greater access to your funds and allows you to write checks, but it requires a high balance. Sounds good, but is it safe?
Unlike a money market fund, a money market account is FDIC insured up to the maximum legal limit. The money in a money market account is completely safe. The higher interest rate can be provided to you because the bank is not as restricted in how it can safely invest these funds as it is in a savings account. The bank has the ability to better diversify money market deposits, allowing it to make more money. While no risk is placed upon your money the bank can pay you more.
Also, money in a money market account is likely to remain with the bank for a longer period of time than money in a savings account. This allows the bank a greater return on their investment of your funds, allowing them to pay you better.
A money market account offers may great advantages over a regular savings account. If meeting the minimum balance requirements is not a problem consider placing some of your liquid capital into this account type.