If you are concerned at all with personal finance and managing your money as best as possible, then I'm sure you have already heard the term money market accounts floating around. Or, perhaps, you are more familiar with its acronym – MMA.
Either way, what you might not know is the definition of money market accounts, how they work, and whether or not there are any risks involved in opening a money market account.
This is exactly why I decided to write this piece. To let you know if and when you want to open a money market account, what are the benefits, and if this type of account, as opposed to a more traditional savings account, is better for your finances. So, let us start with.
What Is the Definition of Money Market Accounts?
To put it as simply as I possibly can and in layman terms, if you will, I can describe money market accounts as follows.
An MMA or a money market account is the combination between a savings account and a checking account.
What does this mean? That you can open a money market account using your own money or savings, hence the similarities with the savings account. But you will also receive a debit card or a number of checks, hence the idea of a checking account.
The bank you decide to open your money market account with will also allow you to make a limited number of transactions every month. However, it’s important to note here that a money market account will not give you the same amount of freedom as the more traditional checking account.
And since I started talking about the differences within the definition of money market accounts, I should also mention that there is a difference between money market accounts and money savings accounts as well. For example, money market accounts have much better interest rates than savings accounts. However, they will ask you for a much higher minimum deposit. So, keep that in mind!
The definition of money market accounts also includes the fact that you can open this type of account with a credit union or a regular bank. Both institutions will offer you high interest and high yield checking accounts that can result in better rates. Still, they also have many more restrictions when it comes to money market accounts than regular ones.
Examples of Money Market Accounts - Best Money Market Accounts of 2021
If you look up examples of money market accounts online, this is exactly what you'll get - examples. But I'll do something better for you.
I have prepared a list of the best money market accounts of 2021 that you can use right now. They offer a combination of everything that is best about checking and savings accounts, and, at the same time, they have low fees and minimum requirements.
1. Axos Bank - the minimum deposit requirement is $1000. The annual percentage yield is 0.60%, and they do not charge a monthly maintenance fee. Overall, Access Bank pays a very high rate when it comes to all its balances.
2. Connexus Credit Union- the minimum deposit requirement is $1000. The annual percentage yield is 0.50% to 1.15%. They do not charge a monthly maintenance fee. You will get higher rates if you make bigger deposits. Please take into account that the earning structure is more complicated than with other accounts that I've put on this list.
3. NBKC Bank - there is no minimum deposit requirement and no monthly maintenance fee. The annual percentage yield is 0.25%. The rates are very competitive and the fact that they will not ask you for a minimum deposit definitely qualifies as a fantastic criterion. They also don't have overdraft fees, no return item fees, non-sufficient funds fees, or fees for eStatements.
Sallie Mae Bank - there is no minimum deposit requirement and no monthly maintenance fee. The annual percentage yield is 0.40%. The bank offers a high APY, as well as check-writing privileges. However, please note that this money market account will not offer you a debit card.
Ally Bank - there is no minimum deposit requirement and no monthly maintenance fee. The annual percentage yield is 0.50%. One of the most important things you need to keep in mind is that Ally Bank is completely online. However, they do have customer support via email, live chat, and phone 24/7. They will provide you with a debit card and checks. Always remember that some of the transfers and withdrawals they offer will be limited. This means you have to stick to a fixed per statement cycle.
How Do I Choose a Money Market Account?
Just knowing the best examples of money market accounts is not enough. Even though it's a great list, you also need to know how to choose the perfect money market account that is suited to your needs.
These are the things you need to take into account when applying for a money market account.
The APY - always choose a money market account that will give you the best APY as well as meeting all of your necessities.
Minimums - as you've seen from the list above, the minimum deposits depend on the bank or credit union you choose. The best idea is to find a money market account that requires minimums that you can always afford.
Fees - read your contract thoroughly and keep an eye on monthly fees as well as any extra fees that will take a chunk out of your returns.
Digital banking - make a list of the mobile and online banking features you need the most and choose the credit union or bank that offers those features or even exceeds them.
Safety - always choose a money market account that has been insured by the FDIC or the Federal Deposit Insurance Corporation. The institution allows as much as $250,000 for every bank per depositor should any kind of failure happen. If you choose a credit union instead of a bank, then your account should be insured by the NCUA or the National Credit Union Administration.
How Do Money Markets Work?
Now that I've told you everything you need to know about money market accounts, let's talk about a different topic that I know you are also very interested in - money markets. And of course, adjacent to them, market funds and savings accounts.
The first thing we need to do is to define the money market itself.
A money market involves short-term investments and only deals with liquidity. On average, all of its investments need 3 to 12 months to mature, which is why we can refer to them as cash investments. Now you can understand why we define the money market by using the term money.
There are different types of mediums you can use if you want to invest in the money market. Every medium in itself will give you the chance to participate via distinct financial products.
Here are some examples that I know you will be interested in:
- Commercial paper
- Treasury bills
- Deposit certificates
- Banker’s acceptance
- Money market funds
- Money market accounts
How Do Money Markets Work?
We know the definition, now let's find out exactly how to invest in a money market. Evidently, the simplest way would be to open a money market account. However, if you are an investor, you can also buy Treasury bills if you check out the United States Treasury official website. In the same way, you can purchase CDs from any banking institution you choose.
I should mention here, as we are talking about how do money markets work, that you will find a few obstacles in your way to purchasing some of these financial products. For example, most of these accounts, including a money market account, will require you to have a minimum balance.
Another example is the fact that CDs have a stipulation of a penalty any time you make a withdrawal. All of these stipulations make sure that the funds are stable, liquid, and vested.
How Does a Money Market Fund Work?
The first thing you need to know about a money market fund is that they are specifically constructed for investors who only have short-term goals in mind. Therefore, if you find yourself included in this category, then let me tell you more about how does a money market fund works.
As an investor, you will have to direct your capital into fixed income instruments that have very short residual maturities. This means less than a year. Examples include certificates of deposit, Treasury bills, and commercial paper.
Another very important thing that you need to understand is the fact that money market funds are used as capital protection and not to give you high returns.
As a result, if you delve deeper into this side of the financial world, you will notice that most fund managers who have vast portfolios of mutual funds are very cautious and only invest in instruments with a very high credit rating.
Since you want to know how does a money fund market works, this is a piece of information that you always need to take into account.
What Is the Purpose of Savings Accounts?
First of all, allow me to define it for you. A savings account is a very traditional type of account that you can open at a credit union or any bank of your choosing. It will offer you the possibility to secure, make a deposit, and withdraw any amount of money you want.
As you might already know, typical savings accounts offer you interest when you deposit. But the interest rates are usually very low.
When it comes to the purpose of savings accounts, there are many reasons why you should open one if you have the chance to do so.
Here are some of the benefits of having and maintaining a savings account:
It is a very safe place where you can save your money. Evidently, if you have extra money or a large sum that you need to deposit, it's a lot better to keep it at the bank of your choice than to store it at home or hide it somewhere. The bank, backed up by the federal government, will not only keep it safe but will also ensure it. In this way, if an accident happens, you will get the entire sum back.
You can receive interest from your savings account. Most banks will offer you a tiny interest rate. This means that they will add a small sum of money to your deposits, most likely every month.
Please keep in mind that the interest rate always depends on how well the economy is doing at that moment in time. It also depends on the bank you choose to open your savings account with.
Work toward achieving your personal finance dreams. Having a personal savings account will help you save more money rather than spend it. Plus, you can create a budget and stick to it.
In the long run, this means that you can achieve your financial goals much easier than by keeping your money at home or just in your wallet.
What Are the Risks of Money Market Accounts?
Since I always strive to give you the best and most objective information, let's finish this piece by taking a look at the risks of money market accounts.
In this way, we can make an informed decision on how your financial arrangements should proceed.
Limited checks and transfers - Simply put, you cannot use a money market account to pay your monthly bills. Most banks and credit unions only allow you to perform six transfers every month. Three of these transfers must be made through checks or through your debit card. As a result, you might not be able to pay your bills using this account.
The interest rates could vary - once again, the best part of all credit unions and banks offer tiered interest rates for their money market accounts. Therefore, you will qualify for the very great interest rates as long as you have at least $10,000 in your account. Apart from that, the interest rates fluctuate for a given period, the bank or credit union not being able to guarantee their stability.
You will be exposed to inflation and taxes - it is true that a money market account will make you a certain amount of interest. Meaning that the bank or credit union that you have chosen to open your account with will offer you a certain percentage of interest every month. However, that sum of money that the bank or credit union gives you every month will be reduced seeing as you are exposed to federal income taxes. At the same time, the buying power that you have will be reduced again by inflation if it so happens that the interest rate your bank or credit union has offered you is now less than the current rate of inflation.
You have free access - if you are the kind of person who loves to impulse shop, then a money market account is not for you. Please take into account the fact that money market accounts do not have a fixed time. At the same time, this type of account gives you free access any moment you want to access your money. As a result, you might be tempted to make any kind of withdrawal you want and simply spend it. Therefore, the account might not be the best choice if you're planning on budgeting or saving money for a long-term goal.
Fees and minimum balance - one of the main differences between a money market account and a typical savings account is the fact that it will require you to have a minimum balance. Some banks and credit unions ask for $1000 while others ask for a higher amount such as $10,000. When your minimum balance goes below this sum of money, the bank will add up a fee that you will have to pay. At the same time, you will have to pay another fee if you write too many checks or if you make too many withdrawals using the automatic teller.
What Do You Think About Money Market Accounts?
In my opinion, the most important thing is for you to understand how money market accounts work before applying for one. Fortunately, you now have this extensive article to guide you through the world of money market accounts, the money market in itself, market funds, savings accounts, and more.
Make sure you give it a good read and take into account all the options you have.
Money market accounts are definitely a fantastic choice for everyone who wants to deposit their savings into a safe account that has been insured and which will also yield a small monthly interest that will add up over time.
If this is the right choice for your financial needs, you will see that signing up for a money market account won't actually be that different from a traditional bank account!