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It's always smart to set aside some money in savings, whether it's to save for a specific goal like a house down payment or to build up an emergency fund to help you avoid going into debt if your car breaks down. While you can always stash your cash in a traditional savings account, access to the money is usually somewhat limited, and the interest rates are nothing to write home about. Checking accounts are more accessible and offer unlimited transactions, but they generally earn little to no interest.
That's where money market accounts come in. These financial vehicles are like a hybrid of the two. They typically have higher interest rates than a regular savings account, but they're more like a checking account in the sense that it's usually easier to get your hands on your money.
How Does a Money Market Account Work?
A money market account is a deposit account much like a savings account in that you can add funds at any time, and since it's interest-bearing, it grows over time even if you stop contributing to it. The interest rate on money market accounts is usually variable, and interest compounds at a predetermined interval (for example, daily, monthly or annually).
Also, just like a conventional savings account, you are limited by federal regulations to only six electronic withdrawals or transfers a month, and your money is insured by the Federal Deposit Insurance Corp. (FDIC).
However, unlike most savings accounts, money market accounts give you the ability to write checks and in some cases use a debit card and make ATM withdrawals. This makes it a little more like a checking account since it's easier to spend the money directly.
One of the key differences between money market accounts and these other accounts is that some money market accounts require a minimum dollar amount to open them, and others require you to maintain a minimum balance to avoid monthly fees.
Who Should Open a Money Market Account?
A money market account makes sense if you want a place to park your savings and watch it grow, and you won't constantly need to tap the funds. While your returns won't be as high as you might see by investing in the stock market, money market accounts are a safer and more easily accessible place to keep your savings, making it ideal for conservative investors or those who want to keep a portion of their overall savings in a liquid account.
Since money market accounts typically require a minimum to open them and some require an ongoing minimum balance, they're not for everyone. If you plan to start with a small amount of savings and might need to occasionally drain your balance, a traditional savings account with fewer restrictions might be a better fit.
Choosing a Money Market Account
First, take a second to determine how much you're ready to invest in your money market account. For example, if you have $1,000 to start with, that will rule out any money market accounts that require a higher minimum amount to get started.
Next, compare options at several different financial institutions and look for the highest interest rate. Keep in mind that money market accounts often pay out higher interest rates for higher balances, so read the terms closely to ensure you know what rate you'll actually get. Also, check to see how often the interest compounds. The more often it compounds—for example, daily instead of quarterly—the faster you'll earn returns on your savings.
Read the fine print and see if you're required to keep a minimum balance. If so, and you aren't able to maintain that minimum, you typically have to pay a fee. Look closely to make sure you're aware of any other fees that might impact you. You can also keep your eye out for incentives, like cash bonuses, which some financial institutions offer to interest new customers.
You should also compare how the different accounts allow you to access your money. Most money market accounts allow check writing, but not all have linked debit cards or permit ATM withdrawals. Think about how you'd want to access your cash, and look for accounts that provide those options.
Money Market Accounts vs. Savings Accounts
A money market account is a type of savings account, but it's different from a traditional savings account in a few ways, one being that money market accounts typically offer higher interest rates. Also, a regular savings account usually requires no more than a few dollars to open, and if there is a minimum balance to maintain, it's usually fairly low. Some money market accounts, on the other hand, require higher amounts to open and a greater minimum balance.
However, they're similar in that they're both intended for saving rather than everyday spending, since you're usually limited in how many times you can withdraw or transfer funds each month. Some money market accounts come with their own debit cards, which can make them more easily accessible than some savings accounts. Regardless of these differences, both money market accounts and savings accounts are intended to help you save money and earn interest on those savings, rather than make everyday purchases like you would with a checking account.
Money Market Accounts vs. CDs
Another type of savings vehicle is a certificate of deposit, also known as a CD. These accounts are opened for a set time period, after which the account has "matured," or accrued all of its interest. Your money isn't freely accessible during this time, so interest rates are usually higher than savings accounts, and sometimes higher than money market accounts. While you can usually get ahold of your money sooner than the maturity date if you have a financial emergency, most CDs charge you a penalty fee for early withdrawals.
Unlike a money market account, which often has a variable interest rate, the interest rate on a CD is fixed, so your returns are guaranteed. The interest rates for CDs vary depending on how much you're willing to invest, with higher deposit amounts garnering a better rate. While interest rates on CDs are higher than on savings accounts, and sometimes higher than money market accounts, these accounts offer less flexibility and therefore are better for those who won't need to access to their cash while it grows.
Money market accounts are a safe way to save, and they provide a higher rate of return than a conventional savings or checking account. Plus, the funds are often easier to access than with a savings account. But keep your eye out for high minimum deposit or balance requirements, which can make them out of reach for those just getting started with saving.