If you have ever heard the term money market account and been confused, it’s completely understandable. The term, especially when called an MMA, may seem looming and overwhelming. Understanding what exactly a money market account is doesn’t take being a big time banker. The easiest way to understand what a Money Market Account is, is to compare it to a savings account or a CD (Certificate of Deposit).
Savings Account Vs. Money Market Account Vs. a Certificate of Deposit
Comparing and contrasting the well known savings account to a money market account outlines what the account entails. When you put your money into a savings account, the bank is limited to only letting YOU make withdraws from the account. With a money market account, the bank can make small, low-risk investments with your cash that will earn money over time. The bank may choose to put your money in a certificate of deposit or in a government security to make you more money over time. If the bank investing for you makes you worry, have no fear. Your money will be backed up by the Federal Deposit Insurance Corp, up to federal limits.
Money market accounts, just like savings accounts, are federally limited to 6 transactions per day, including withdrawals and outgoing wires. If you make more than 6 of these transactions per day, a bank is likely to charge you an overage fee. When compared to a certificate of deposit, commonly known as a CD, an MMA and a savings account have a lot of flexibility.
An MMA and a savings account let you have access to your deposited money whenever you need it. A CD has a fixed-term length and the money inside the account cannot be touched until that term is over. If you choose to take money out of a CD early, very hefty fines are typically placed on the account. Depending on which bank you go to, the CD’s term could be a few months or more than five years. If you are looking for long term investment in an account, a CD is a viable option. If you need your money at any given time, a savings or MMA account is what you need.
Most savings accounts have a minimum balance they must be opened with and kept in the account to avoid a monthly “maintenance fee” on the account. The minimum amounts on a savings account, however, tend to be significantly less than that on a MMA. MMA’s can require anywhere from $1,000 to $10,000 to open an account and avoid being charged fee’s. CDs, in this case, are more similar to an MMA. They require a large minimum balance to open, but you will not have to worry about the monthly minimum balance since you cannot access the money in the account until the term is over.
Savings accounts and MMAs both earn interest on the balances in them. MMAs typically have a much higher annual interest rate than savings accounts, but have lower interest rates than a CD. The Federal Deposit Insurance Corporation, more commonly known as the FDIC, has stated that the average annual percentage yield (APY) on a MMA was 0.08% at the end of June 2016. On a savings account, the average APY was 0.06%. A one-year CD’s average APY was 0.22%. These are the average rates nationally, and actual APYs will vary from bank to bank.
Electronic Accounts Have Higher APYs
Modern day technology has opened up a huge variety of electronic banks. When you bank online, you will often find savings accounts that have higher APYs than a MMA. At Ally Bank, an MMA has a 0.85% yield, but a savings account has 0.99%. Another online bank, Discover Bank, is offering MMAs with up to 0.85% and savings accounts with 0.95%. Banking online tends to bring higher interest rates and have large APYs.
The same applies to CDs. Traditionally, CDs already have larger APYs than an MMA or a savings account, but high yielding accounts online have increased those rates even more. By looking for a CD online, you could possibly find a very high APY that will bring large earnings over time. The more money that is put into a CD along with a longer term typically will earn a high yield as well.
The Perk of Spending
When you have an MMA, you normally will receive a debit card to make transactions with. Savings accounts and CDs do not receive a card that you can use to make purchases. If you wanted an account to spend money with, you would have to open a checking account to go along with the CD or savings account. An MMA gives you the easiest access to your money immediately.
What About a Money Market Fund?
Though they have similar names and acronyms, money market accounts and money market funds are very different entities. MMAs are available at almost any bank and are backed by the FDIC. An MMF, however, is a mutual fund that invests your money in a low-risk way. If you want an MMF, you will have to visit a broker. In an MMF, if you lose it all, the FDIC will not back your money and you will not get it back.
MMFs typically will keep the investments very low-risk, so the possibility of losing money is there, but highly unlikely. Still, MMFs are not a for-sure thing. In 2008, one MMF went under and only returned $0.97 for every $1 that was invested. Though the difference may seem small, that is a large chunk of change when you have invested thousands of dollars. If you want to start investing in a relatively safe environment, an MMF will be perfect for you. If you are looking for a safe place to earn a bit of interest on your money, an MMA is a much better option.
Should I Open an MMA?
Money Market Accounts are without a doubt one of the best places to keep your money. They are very similar to savings accounts and typically have a higher APY. If you can make the minimum deposit requirements, an MMA could benefit you more than just a traditional savings account. If you want ease of access to your account through a debit card or checks, an MMA is your best bet as well. If you do not want to use an online bank to get a higher interest rate on a savings account, an MMA at a physical bank is a great option. If you need to be able to access your money immediately, an MMA is a better option than a CD. An MMA could be the type of account you are looking for if you would like a higher interest rate and want to access your money instantly.