Money Market Accounts

May 7th 2016

Overview

Money market accounts are accounts that can be opened with a bank or a credit union. These are also known as "MMDA," which stands for money market demand account or money market deposit account. They operate somewhat like savings accounts. The interest rate for a money market account is typically higher than that of a savings account. The minimum balance requirement is also higher than that of a savings account. With a money market account, you can write checks that are similar to normal checks. However, there is a limit on the number of checks that can be written and the withdrawals that can be made.

How It Works

It's important to be sure that you are investing in the right type of account. For instance, your bank might be offering something called a money market mutual fund in addition to a money market deposit account. Although they sound similar, these are two different forms of investment. Money market accounts are deposit accounts and function like regular savings accounts. Once your money market account is opened, a small book, called a register, is given to you to track deposits, withdrawals, and the current balance. A book of checks is also issued. You can use a set number over a certain period of time without penalty, as long as the balance in your account is above the minimum, which is usually $1,000. You can transact on a limited basis with your money market account. Most banks permit you to write three checks monthly. Reconciling can be done every month when the bank sends a statement of your account by mail or e-mail that lists your transactions along with any interest earned or fees charged by the bank.

 

Benefits

The yield that you get from money market account is more than what you get from the traditional savings account because the interest rates are generally higher. Money market accounts in banks are insured by the Federal Deposit Insurance Corporation (FDIC) and those in the credit unions are insured by the National Credit Union Administration (NCUA), which implies that the money is safe even if the institution becomes bankrupt. There is easy access to the deposit in your account in the event of any emergency. Money can be accessed by writing checks, making a withdrawal by telephone or Internet, debit cards (in certain cases), or by having automatic withdrawals sent to the accountholder's local checking account.

Cost/Pricing

The cost of opening a money market account depends on the financial institution that you have opted for. Most institutions demand a minimum balance of $1,000 or $2,500 in a money market account, while some require even higher.

Timing

An investment in money market accounts is not subject to market timing restrictions. People who require easy access to their savings can look into money market accounts anytime because generally, there are services including free check-writing, automated electronic exchanges, telephone exchange, and redemption.

Companies/Industries

Financial institutions like banks and credit unions offer money market accounts. It is wise to compare what different banks are offering. Points you need to focus on are fees and service charges on the account, the minimum balance, required and the rate of return. Bankrate.com recently produced a ranking list of the top 50 money market rates. Everbank ranked the highest of all with a 1.83% rate. Their monthly service fee, however, is roughly $9. Flagstar came in second with 1.81% rate and does not require a monthly service fee.

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