What is a Money Market Account?
A money market account is an interest-bearing account that can be opened banks or other credit unions. This post go over how a money market savings account works, answering the most common questions in QA format.
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What is money market accounts and how does it work?
Money market accounts are like a hybrid of your typical checking account and traditional savings accounts. Like other savings accounts, they earn interest based on the current market rates. Interest rates for a money market account should be posted somewhere in your financial institution so that you can compare them to other types of accounts.
They are also like a checking account in that you will be able to write checks to withdraw money, can be issued a debit card that is linked to the account and can use an ATM to deposit money or to make withdrawals.
You can start most money market accounts at your bank or at credit unions. It is important to shop around so that you are getting the best interest rates. You should also know that there is typically a minimum balance requirement not only to start the account but to maintain it as well. If you withdraw money and the balance goes below the required amount there could be penalties and account maintenance fees.
Is a money market better than a savings account?
Yes and no, depending on your situation. If you have enough money to meet the Money market account minimum average daily balance they may be the better option especially if you can find one with a higher interest rate than a standard savings account. If you will struggle with meeting or keeping that minimum you are better with a regular savings account.
An interest-bearing account like a money market account works best when the balance remains relatively high because the more money you have, the more money you get in terms of interest.
Can you lose your money in a money market account?
A money market savings account is FDIC insured for up to $250,000 the same as other bank accounts so your money is safe. There are also Money Market Mutual funds that have neither FDIC nor NCUA insurance because they are different types of accounts. These are investment accounts and you can lose your money with them.
What are the disadvantages of a money market account?
There are several key disadvantages to money market accounts. First, you may be limited to the number of transactions such as ATM withdrawals and check writing that you can make in a single month. Second, there is a monthly maintenance fee plus other fees and penalties if you drop below the money market funds minimum balance requirements.
There are other financial tools that pay interest at a higher rate with more flexibility. If you do not have the money and are worried about the monthly fees you might need to consider regular savings accounts possibly from an online bank.
Did you know that most online banks offer the same types of accounts with competitive interest rates but with fewer fees and a lower minimum deposit amount?
Another thing to consider: if you are not really concerned with earning interest and basically just need the type of deposit accounts that lets you have unlimited transactions, can offer check-writing privileges, plus a debit card and ATM access, standard checking accounts are probably best for your needs.
How does a money market account compare to a 529 plan?
You can use money market deposit accounts to save for your child’s college or for an emergency fund because it has much more flexibility than the average 529 plan but there is a trade-off. With that flexibility, you lose the tax benefits you get with the 529 plan including not having to pay taxes on the balance as long as it remains in the account. You also do not have to pay taxes if the money is used for any of the qualified educational expenses.
You can compare the annual percentage yield or APY of both types of accounts before making a decision by getting this information from the bank or credit union. Be sure to ask about the fees that are associated with the money market account as well.
The 529 plan does not have a minimum deposit in most cases so you can open one with very little money. You can also use additional savings tools like a Upromise account to grow the plan’s balance. Upromise is free to join and lets you link your savings plan for automatic savings. You can save even more if you apply for the Upromise Mastercard. This credit card lets you earn cashback on purchases, meals out, and other expenses.
When should I open a money market account?
You should open a money market account when you need the security of FDIC or NCUA insurance, a higher interest rate than other savings accounts, and the ability to use the tools of a checking account when needed. In other words, these accounts are best for people who want to safely save a decent amount of money for an emergency fund but not for day-to-day expenses.
Do not open this type of account if you are not going to be able to keep up with the minimum balance requirement or if you do not want to pay the monthly fees. If you are just starting out and do not have a lot of money to save yet, you may be better with another type of account.
Can I open a money market account in investment apps like Robinhood or Stash?
No, you cannot open a money market account with either Robinhood or Stash. These apps allow you to open an account so that you can buy, sell, or trade stocks, crypto, and other investment types. If you are new to the stock market, Robinhood can be a great way to start learning. If you open an account, you may earn free stock shares that you can use to grow your investments.
Where can I get free money for my money market account?
It’s all about saving money unless you do not have a lot of it to save. If your account balances are very low, you may not have a lot of options for the type of account that you are able to open. The remedy is to make some extra money so that you can start building toward your own money market savings accounts in the near future.
If you do not want to take on a second job just to open an account, there are other suggestions. Side hustles that you can do on your own time and on your own terms may be the solution and can add to your savings or checking account. But, which side hustle will you choose?
There are many to choose from including:
- Driving for Uber or Lyft.
- Delivering food with Postmates.
- Shopping for and delivering groceries with Instacart.
- Opening a Swagbucks account.
- Selling items with eBay.
Bottom Line on Money Market Accounts
A good money market account is like the best of both worlds between a high yield savings account and a checking account. You get the safety of the Federal Deposit Insurance Corp. (FDIC), plus a higher interest rate on your money.
There are some drawbacks, but for certain purposes, they are among the top option offered by the banking industry. Before you consider one, learn how money market accounts work, the fees, the average interest rate, and all other relevant information. Write down questions that you might like to ask and get the answers before creating any type of account. Banks and credit unions that do not want to answer questions do not want customers.
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