What is a Money Market Account?
A money market account is a type of bank or credit union savings account that incorporates some features usually found in checking accounts. Like regular savings accounts, this account pays interest on your money, but it works slightly differently. You typically earn higher rates of interest, but the deposits or balances required may also be higher.
If you are considering opening a money market account, understand that the interest banks and credit unions pay on them vary, because some institutions are more anxious to attract your deposits than others. Also, many banks and credit unions will pay you more interest if you keep more money in your account. And, the rates that institutions pay on money market accounts can be changed without notifying you. Finally, many institutions will charge you a fee, if you fail to maintain a minimum balance or you exceed its limit on withdrawals. If you are interested in opening an account, check with several banks to see their ground rules.
All money market accounts at banks are insured currently up to $250,000 by the Federal Deposit Insurance Corporation, an independent agency of the federal government. If you have a money market account at a credit union, it is insured by the National Credit Union Administration, also a federal agency. Not only do money market accounts pay higher interest, they are safe. In addition, most institutions pay what is called compound interest on your money market account. That means it pays interest on the interest you have already received.
Money market accounts set limits on how often you can withdraw or transfer money each month, depending on the withdrawal or transfer method you use. For example, an account may allow up to six withdrawals per month by check, electronic debit card or transfer. Other transactions, such as ATMs and telephone check payments may not have a limit. Each month, you will receive a statement that sets out the transactions that have taken place during the preceding month, along with the fees you have been charged.
Because money market savings accounts pay more interest than regular savings accounts, they have become especially popular for people who are saving for their retirement. Since the so-called Baby Boom Generation has begun to retire, the future for this type of bank account is very bright. Also, during difficult financial times, many investors will choose to leave the stock market and put their money away in a money market account until the economy improves.
Money Market Funds
Money market accounts should not be confused with money market funds which are investment products. Although stock market funds may bring in higher returns if the market performs well, they may come with risks to capital savings and have no guarantee of returns. Unlike money market savings accounts, they do not have insurance from the FDIC or NCUA.