A money market savings account is quite similar to a regular savings account save for the fact that quite often the interest rate is higher and that a number of restrictions are imposed, including a minimum balance or a limited number of monthly transactions.
These accounts are seen as an assured way of getting a guaranteed return on monies and this is why they are preferred by conservative investors. Practically speaking, there are not too many differences between the money market account and the savings account; the dissimilarities can generally be termed as restrictions. These restrictions are what compel banks to exercise more prudence in using funds deposited in money market accounts and also the reason why account holders earn higher rates of interest.
1A Brief History of Money Market Savings Accounts
Money market accounts rose to prominence in the early 1980s as very competitive short-term cash instruments of investment that were safely managed. Account holders enjoyed privileges including the writing of checks and earning of interest. As interest rates dropped gradually over the years the popularity of these accounts also waned. However, money market accounts still play a useful role today.
2General Features of Money Market Savings Accounts
A money market account is a viable alternative to both a savings and checking account and is a useful instrument for investors and non-investors alike. You will find these accounts in many banks and allied financial institutions and, similar to other account types, you will be issued with a regular statement showing your account balance. These accounts also pay interest but the rates are lower compared to what bank accounts offer. Most money markets are FDIC insured for for up to $250,000 currently. See this article to learn more.
3Practical Uses for Money Market Savings Accounts Today
A money market account is currently used by many people as a place where they can keep monies that are not invested. In this regard these accounts are often used as the perfect location for emergency funds, or alternatively as the location where money intended for an impending major expenditure is parked.
A practical example can be seen in the case of parents who have for a number of years been making aggressive investments aimed towards creating a college fund. As the college timeline draws nearer it will be quite prudent for the parents to shift the accumulated monies to a place where it is both low-risk and safe, i.e., a money market account. Majority of the money may be directed towards zero-income bonds to make additional income but the money market account will definitely have enough funds in it to cover the initial tuition check.
4Using a Money Market Account for Investment Requirements
The money market account can also be used as a place to hold and build up money that is intended for investment purposes, either until the investment strategy has been fully developed or in between consecutive investment plans. Most brokerage houses use these accounts in this way to not only keep their customers’ non-invested money safe but to also earn interest from it. The customers are therefore assured that their monies are safe and are thus able to make further investment decisions unperturbed.
The money market account is therefore a good choice of account when you need to save money that is not intended for immediate investment. It is equally good when you need to hold monies that you have earmarked or future investment projects or other commitments.
5Advantages of Money Market Savings Account
- As with savings accounts, money market accounts are liquid and as such they allow for withdrawals at your convenience. You must however bear in mind that you can only make a limited number of transactions on a monthly basis.
- They earn higher rates of interest compared to savings accounts.
- In most scenarios, money market savings accounts and regular savings accounts are government insured for up to $250,000 and for this reason you need not worry about your money’s safety.
- This account is very useful when you need to keep away some money for contingency reasons. In the event that you are caught up in a financial crisis, e.g., after losing your job, you can support yourself with the money you saved.
6Some Drawbacks of a Money Market Account
Compared to the savings account there are a few drawbacks that you’ll have to reckon with as you operate a money market account:
- To open a money market account you need to have a considerable chunk of money as your minimum deposit, e.g., the minimum deposit for this account may be $10,000 while that for a savings account at the same institution may be $5.
- You also have to contend with restrictions in as far as check writing privileges are concerned – some institutions offer limited opportunities while others don’t offer checks at all.
- The number of withdrawals you can make monthly is also restricted and where the number is higher than say three to six you may have to pay transaction fees.
