A money market account is an account that bears interest at a bank or credit union. However, it should not be confused with a money market mutual fund. A money market account is also referred to as money market deposit accounts (MMDA).
Money market accounts (MMA) have some unique features that cannot be found in other types of accounts – most money market accounts pay a higher interest rate than a regular passbook savings account and often get the privileges of check writing and getting a debit card. However, money market accounts also come with restrictions that make them less flexible than a regular checking account.
Money market accounts are different because they combine the best features from the savings accounts and the checking accounts. Although you still get to give up some privileges, you get from other accounts. It has its merits and demerits.
History of Money Market Accounts
Before the early 1980s, the federal government placed a limit on the rate of interest that banks and credit unions could give the customers on savings accounts. A lot of institutions resorted to giving out incentives such as small appliances that included toasters and waffle irons to attract deposits from customers.They had to do this because they couldn’t compete with money market mutual funds when it came to interest rates.
The money market mutual funds were Introduced in the 1970s. Brokerages and mutual fund companies trade the Money market mutual funds. However, after pressure from the banking industry, Congress approved the Garn-St. Germain Depository Institutions Act in 1982. The act allowed banks and credit unions to offer money market accounts to customers, and it paid a money market rate, which was higher than the previously approved rate.
How Money Market Accounts Work
You can access money market accounts in most traditional and online banks and at credit unions. They have both pros and cons when compared with other types of accounts. Some of the advantages of the pro include higher interest rates, insurance protection, and check writing and debit card privileges. While some of the cons are limited transactions, fees, and minimum balance requirements.
The advantages of the money market according can be summed into its earning ability and the easy access it offers when compared to another form of accounts. Although, there are limits to how you can take out money and this might not be favorable to some set of people.
Higher interest rates
Perhaps, the biggest attraction of the money market accounts is that they offer better interest rates than savings accounts. According to bank rate, in early 2019, the average interest rate for money market accounts was 0.15%, while the average savings account stayed at 0.09%. The highest money market account rate that was offered by an institution was as high as 2%, while the highest savings account rate wasn’t more than 1.90%.
For example, during the 1980s and 1990s, and well as a large part of the 2000s, the overall interest rate was higher, and this caused the gap between the two types of accounts to grow wider. As a result of this, money market accounts became further attractive. Money market accounts offered a higher interest rate because they had the permission to invest in certificates of deposit (CDs), government securities, and commercial paper – a thing in which savings accounts don’t have the permission for.
The interest rates on money market accounts vary, which is as a result of rising or fall in inflation. How the total interest is compounded yearly, monthly or daily might have a considerableimpact on the returns of the depositor, especially if they constantly keep a high balance in their account.
Another amazing thing about the money market accounts is that it provides federal insurance protection, something money market mutual funds do not do.
Every money market account at a bank is insured by the Federal Deposit Insurance Corporation (FDIC), which an independent agency of the federal government. The FDIC looks after some particular type of accounts, which includes the money market account, and is up to $250,000 per depositor per bank.
In a case where the depositor has other insurable accounts at the same bank (can be checking, savings, certificate of deposit accounts), they are all included in the $250,000 insurance limit. In the case of Joint accounts, they have a higher limit and can be insured for up to $500,000.
When dealing with credit union accounts,the equivalent of the FDIC is the National Credit Union Administration (NCUA). They provide parallel insurance coverage, which is $250,000 per member per credit union, and $500,000 for joint accounts. If a depositor wants to insure more than $250,000, the simple way to achieve that is to open accounts at more than one bank or credit union.
Debit cards and check writing
Money market accounts ensure easier access to your money. You are allowed to withdraw cash and write checks, as well as debit cards that will enable you to make purchases anywhere and anytime.
The easy access offered by money market accounts along with its juicy interest rate is what makes it great.
Limits on transactions
One disadvantage of the money market account is that the Federal Reserve Regulation D restricts depositors to a total of six transfers and electronic payments each month.
Depositors who exceed the limits may be incurring a fine. In the case they continue with it, the bank is required to put an embargo on their transfer privileges,move them into regular checking or close the account
However, depositors are free to make an unlimited number of transfers in person at the bank, by mail, by messenger, or at an ATM. They are also eligible to make as many deposits as possible. The types of transfers affected include pre-authorized transfers (including overdraft protection), telephone transfers, electronic transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers.
Minimum balance and fees
Money market accounts require a large amount for its minimum balance. You can open a savings account with little deposit, but when it comes to money market accounts, you might need as much as $2500 to serve as the first deposit. If you keep below the minimum balance in your account, you’d have to pay monthly fees, and this will affect the returns you get on your money.
You also have to be wary of interest rates that sound too good to be true on money market accounts. Some make this interest rate a promotional thing before reducing it later, make sure you confirm before opening a money market account.
Uses of Money Market Account
Money market accounts are good for the money you are not going to need immediately. It is best to keep the money you need in the future in a money market account, as it will help you earn profit as you keep your money safe and accessible at all times.
It is best to keep large funds, and you don’t frequently need in money market accounts. It isn’t the best account to keep frequently needed funds and regular expense money due to the limit on check-based payments you can make.
Funds like emergency funds, tuition, and yearly vacation funds can be kept in the money market account. You can also keep funds like your monthly mortgage in a money market account to get some interest.
Accounts that can that can be alternatives to Money Market Accounts
There are some alternatives to the money market account that have their benefits and are by banks and credit unions.
Passbook savings accounts
The difference between this and money market accounts is that regular savings accounts usually have no initial deposit or minimum balance requirements. These accounts also pay interest, even though they aren’t usually as much as that of a money market account. Similar to money market accounts, passbook savings accounts also have insurance from FDIC and NCUA. They both also restrict depositors to six transfers per month with little adjustments’.
Money market mutual funds
Unlike the money market account, money market mutual funds, which are offered by brokerage firms and mutual fund companies, do not come with FDIC- or NCUA-insurance. However, they invest in safe short-term vehicles such as CDs, government securities, and commercial paper, which make them be ranked as low-risk investments.
As the money market account, money market mutual funds also offer quick access to the depositor’s cash. While money market accounts are restricted to six-transactions-per-month, money market mutual funds do not have that restriction.
However, the companies that offer them can place limits on how often depositors can reclaim shares or require the checks they write to be for over a certain amount. The returns on money market mutual funds tend are usually higher than those on money market accounts.
High-yield savings accounts
Several banks and credit unions offer high-yield savings accounts, and the interest rate may be better than on their money market accounts, depending on the institutions. The FDIC or NCUA also insure High-yield savings accounts.
A disadvantage they carry compared with money market accounts is that they may likely carry more rules, such as direct deposits requirements or at least a certain number of transactions per month to avoid penalties.