There are various types of accounts you can open with a financial institution. One of the major accounts available is the money market account. A money market account doubles as a savings account and a type of investment. There is a need to know what the money market account is and how it works before you open an account. The article outlines all you need to know about the money market account.
What is a Money Market Account?
A money market account is a type of savings account you open with a bank or a credit union that earns you interests. The money market account yields interest as long as you maintain the minimum account balance required by the bank. In short, the money market account is a hybrid of a savings and checking account. In that, it is a savings account that allows you to make withdrawals with a check. With a money market account, there is a limit to the number of withdrawals you can make with a check every month. The limit is usually six withdrawals in a month. Some banks allow you to withdraw beyond the six times with other withdrawal methods. For instance, you can make withdrawals from an ATM, bank teller or with a telephone check after the six times limit.
Difference Between a Savings Account and a Money Market Account
It was mentioned earlier that the money market account is a savings account. The truth is that there are significant differences between the money market account and the traditional savings account. Some of the differences between a money market account and the traditional savings account include:
a. Check Withdrawals: In the traditional savings account, you cannot make withdrawals with a check. The withdrawal options available for the traditional savings account holder are ATM withdrawal and bank teller payment. For the money market account, you can make withdrawals with a check, but the check withdrawal is limited to six times in four weeks.
b. Higher Interest Rate: The Annual Percentage Yield APY or interest that a money market account yield is higher than that of the traditional savings account. Little wonder most people liken a money market account to an investment account.
c. Higher Minimum Balance Allowance: Another major difference between a money market account and a savings account is the balance requirement. The opening balance required to open a money market account is higher than that of the traditional savings account. Also, for a money market account, you are required to maintain a higher balance to continue to earn interest.
Also read: What Do You Need to Open a Bank Account
Advantages of a Money Market Account:
a. Higher Annual Percentage Yield: The interest rate that comes with a money market account is higher than that of the traditional savings account. Also, most times, this interest is higher than that of the Certificate of Deposit. The interest in a money market account usually accrues on a daily or weekly basis.
b. Low-risk Investment: The money market account is considered a low-risk investment. A low-risk investment is an investment in which the chances of losing your investment are low. In other words, the default rate of a money market investment is low. Also, the fund in this type of account is insured by the Federal Deposit Insurance Company FDIC if you open the account with a bank. The amount insured is up to $250,000. On the other hand, if you open a money market account with a credit union, the fund is protected by National Credit Union Administration NCUA.
c. Access to Funds: Unlike similar investment option like the Certificate of Deposit where your fund is tied up, the money market account gives you easy access to your cash. That makes it a liquid investment. A liquid investment is a type of investment you can easily convert to cash.
d. Ability to Write Checks: The ability to write checks is one thing that makes the money market account more beneficial than the traditional savings account.
Disadvantages of a Money Market Account
Despite these advantages mentioned earlier, some problems come with maintaining a money market account. The disadvantages include;
a. Limits to Withdrawal: There is a limit to the number of withdrawals you can make with a check. This places you at a disadvantage if there is a need to write more checks within the period.
b. Higher Balance Requirement: The opening balance required to open a money market account is on the high side. Some banks require as much as $5,000 or more to open a money market account. Not just the balance, you are required to maintain this balance for the account to remain functional.
c. Fees: Some fees come with running a money market account. For instance, you pay a closing fee for some banks when you wish to close your money market account. Another fee that is common with a money market account is the excess withdrawal charge. When you withdraw more than the required number of times, you will attract some fees as a penalty.
Also read: Money Market Accounts Vs. Savings Accounts
Difference Between a Money Market Account and Money Market Funds:
It is best to clarify that a money market account is different from a money market funds. One major difference between the two is that banks and credit unions offer a money market account. Investment companies offer money market fund on the other hand. Also, a money market account is insured by the FDIC while the money market fund is not insured.