Money Market: Know What It Is and How It Works

Money Market

According to financial experts, your emergency fund should contain at least between three and six months’ worth of living expenses at any time. This ensures that you are covered for a while in the event of unforeseen circumstances. Nonetheless, what about your shorter-term savings? Where should you keep them? Considering shorter-term savings are meant to provide you with access to money whenever you need it, options such as stock investments are not a good idea due to their volatility. On the other hand, a checking account might not be wise as you may end up overspending. This is why you need to consider money market accounts. A money market account (MMA) is a type of account that allows you instant access to your money, but with restrictions on the number of withdrawals that you can make. Additionally, it has one of the highest payouts of any traditional savings account, thus making it a safe investment vehicle. To understand how money market accounts work, and why you should consider them, it is important that you first understand what the money market is. This article will let you in on everything you need to know about the money market and money market accounts.

What is the Money Market?

This is an exchange market where institutions borrow and lend short-term, high-quality debt securities. These securities have an average maturity period of a year or less. As such, money markets allow governments and large institutions such as banks to get funding for their short-term cash flow needs by selling their short-term securities-providing a low-risk investment platform for individual investors. If you are looking to profit from the money market, you will need to get a money market bank account.

What are Money Market Bank Accounts?

This is a federally-insured bank account that offers higher payouts on your savings. As such, it is the account to have if you are looking for a safe place to save money for short-term goals without affecting your account balance. It is also the account to go for if you want predictable yields. Money market accounts (MMAs) also provide you with more ways of moving your money than typical savings accounts. Nonetheless, there is a limit to the number of times that you can move money from your MMA. As such, you cannot use it like a checking account. An MMA also has a large minimum deposit and balance requirement than a regular savings account.

How Money Market Accounts Work

After opening an MMA, the bank will take that money and invest it in safe vehicles, such as certificates of deposits (CDs) or treasury bonds. While the yield that you earn is still dependent on economic factors, you can rest easy knowing that you can never lose money that you invest through money market accounts, as they have federal insurance. The following are the main features of money market accounts: FDIC Insurance When setting up an emergency fund, the most important factor to consider is your money‘s safety. Money market accounts come with a built-in safety net as the Federal Deposit Insurance Corporation provides a cover of up to $250,000 to an MMA account. Therefore, even in the event of a bank failure, you will still get your money back. However, the same does not happen for money market mutual funds, as they are not insured. Therefore, do not get a money market mutual fund thinking it is the same as an MMA, as they are different products. Combines Features of Savings and Checking Accounts MMAs combine the best features of both checking and money market savings account. For example, like a saving account, an MMA offers you competitive yields. And like a checking account, an MMA also allows for both checks and debit cards. As such, these accounts allow you an easier time managing your money than savings accounts. Nonetheless, even though it also operates like a checking account, an MMA has a limit to the number of times that you can move money from the account.

Benefits of Money Market Accounts

After looking at its features, you can see that an MMA has some distinct advantages over other types of accounts. They include Safety As mentioned, MMAs enjoy federal insurance. This ensures that there is no scenario where you can lose your money. High-interest Rates: Money market account rates have a better interest than a traditional savings account. Moreover, since you are required to deposit a significantly large sum into your MMA account, you get to enjoy higher yields. Ease of Access MMA accounts allows you to withdraw cash or write checks, with some even giving you a debit card to make purchases.

Cons of Money Market Accounts

Despite their impressive features, money market accounts come with some cons. They include: Large Minimum Balance Requirement To operate an MMA, you need to have at least $2,500 in the account, with some MMAs requiring a lot more than that. Additionally, if your balance goes below the minimum, you might start being charged monthly fees that will eat into your yields. Withdraw Limits While an MMA allows you easy access to your money, you are restricted to a number of withdrawals. Most MMAs do not allow you to make more than six transactions in a month.

Why Consider Money Market Accounts?

As mentioned earlier, MMAs are a good choice for those looking for a safe account to keep their shorter-term savings while earning a higher payout. As such, these accounts are suited for: 1. Emergency Funds The two most important factors to consider when looking for an account for your emergency funds are safety and liquidity. An MMA fits the bill perfectly as it has FDIC insurance in addition to allowing you access to your cash when you need it. Moreover, it offers you competitive payouts. 2. Tax Payments If you are a business owner and have to make regular tax payments, it is good practice to separate the cash meant for taxes from the rest of your finances. This ensures that you are always on top of your financial obligations, thus allowing you to avoid penalties. Consider keeping tax money in an MMA, as it allows you to make payments without abusing the transaction limits while earning yields from that cash. 3. Tuition Keeping tuition money in an MMA is a great idea. This is because you allow the money to accrue interest while only paying out once or twice a year.

How to Get the Best Money Market Rates

Money market accounts can differ significantly depending on the institution that is offering you the account. Some offer better rates than others do. As such, if you decide that an MMA is good for you, ensure that you look for one with the best money market rates, as that is what will allow you to earn higher yields. This money market graph shows the average rates from 2009 to date. Use data from that money market graph as you apply some of the following tips: Compare Bank Offers MMAs from different banks often have different features and interest rates. Therefore, compare what each bank’s MMA has to offer before choosing one. In addition to interest rates, the other factor to consider when comparing them is the minimum balance you need to operate the account. While some banks have a high minimum balance or deposit requirements, they also tend to pay clients with larger deposits more. Therefore, you might find yourself having to choose between an MMA with a low minimum deposit requirement and lower interest rates versus one with a higher minimum deposit requirement but with higher dividends rates. Look Online Online banks tend to have the best money market rates, on average. Additionally, most do not have minimum opening requirements, with some not even charging a monthly fee. Therefore, ensure that you check online banking/mobile banking out. Consolidating Assets Most banks tend to give the best rates to MMAs with large balances. Therefore, consider combining money from your different accounts and depositing them into your MMA to enhance your yields.

Money Market Accounts vs. Mutual Funds

MMAs and mutual funds are quite similar in that they are both safe, short-term investment vehicles. Additionally, they both allow the investor quick access to their cash. Nonetheless, while MMAs limit the number of transactions that you can do in a month, mutual funds do not. However, companies that offer mutual funds usually place limits on how often an investor can redeem their shares. These vehicles, therefore, are quite similar. The only difference, however, is that mutual funds do not enjoy FDIC insurance, thus making them a riskier option.

Conclusion

If you are looking for a safe, high-yielding savings vehicle for your shorter-term savings, you cannot go wrong with a money market account. However, to get the most out of your account, it is vital that you compare different providers to find one with the best rates. This will allow you to earn higher yields. Before you open an MMA, ensure that you are familiar with the institution’s rules to avoid penalties. For example, most banks will charge you for exceeding six transactions in a month, while others will even convert your MMA to another type of deposit account with lower interest rates. Nonetheless, money market accounts are excellent for people not looking to use them as checking accounts.

FAQ

Do money market accounts risk?

In today’s business world, money market valuations are typically and strongly related to safety. However, all financial transactions have a variety of risks. The risks involved in money market securities are connected with its reduced returns on investment. All users should learn how to incorporate money market investments into a diverse portfolio according to their financial intentions in order to manage risk at all possible costs. Money market accounts offer rendered by banks and credit union, in fact, share some characteristics with a standard savings account but also add a safe and conservative investment element. However, the main risk in money market accounts is that they do not always keep up with inflation over the long term. Therefore, such accounts are often opened by clients who are looking for an interim place to hold a large amount of money while they decide where to invest. Nevertheless, these enhanced savings accounts offered by banks and credit unions are considered one of the safest investment products as it also offer overdraft protection.

Do money market accounts pay interest monthly?

Money market interest accounts are commonly magnified regularly and paid monthly. The bank is collecting interest funds from the users in their deposit account and also, saving it on the account. The big benefit regarding interest compounding would be that the bank charges users a dividend rate on the interest-bearing income people previously earned. In other words, the financial institution lends the money to other individuals, just paying a little more interest charges than people pay them on their own. Interest rates charged by money market accounts may differ from bank to bank quite a bit. This is because several banks work efficiently than most to get clients to set up an account with them – as they bid better rates.

Is a money market account a good idea?

When we think of a money market account, we can not ignore that it is actually a good way to get higher interest rates, without locking up users’ money for a long period of time. In many ways, a money market account is similar to a deposit certificate, which has far more flexible terms. If an individual needs to access its savings on a weekly or monthly basis, a money market account might be a good option also to set savings goals. Therefore, a user can deposit money that is not immediately needed and then withdraw it if needed at any time. In short, money market accounts give their clients the freedom to withdraw their money. Not to mention that they give you a higher interest rate than most basic checking and savings accounts.

Which bank has best money market rate?

The prime money market accounts possess rate increases far above average daily balance– and also the average rate would be a mere portion of a percent at the moment. Annual Percentage Yield (APY): assesses the impacts of compounding during the year. Using this number is the best way to compare yields, instead of measuring interest rates. The higher APY means the more revenue users can earn in cash. Here we can find the Annual Percentage Yield (APYs) present is from July 2020. APYs can continually change since its last update. Also, for some products, it can differ by region.

  • BMO Harris: 1.10% APY
  • First Internet Bank: 1.01% APY
  • CIT Bank: 1.00% APY
  • UFB Direct: 1.00% APY
  • Sallie Mae: 0.99% APY*
  • TIAA Bank: 0.75% APY*

What is the difference between a money market account and a standard savings account?

Although they are quite similar to each other, they have their points of difference. In money market accounts the bank usually invests in stock markets with the money market fund deposited, the return offers a higher balance since it also has the possibility to get cash by ATM withdrawal using a debit card (or atm card) and including emitting checks. The money market account is different from the regular savings account as they have more commercial purposes since the savings accounts are only deposits with no expiration date, that means, users possess the option to withdraw and make a direct deposit via an automatic transfer whenever they desire, and without penalties at all. The bank can also offer its clients profitability in the form of interest.