How Is a Money Market Account Different From a Regular Account?
A money market account is a special type of savings account that offers benefits not normally found in a traditional savings account. The deposits of an account holder are used to invest in corporate or government bonds. The security and higher rate of return make money market accounts attractive to banking customers. These accounts are more restrictive than traditional accounts and less liquid.
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Purpose
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Banking institutions created money market accounts to compete with money market mutual funds. Unlike money market funds, money market accounts offer security with coverage from the Federal Deposit Insurance Corporation (FDIC). More requirements for starting a money market account were put into place than normally exist for regular checking or savings accounts to better allow banks to control customer deposits. FDIC protection, higher interest and accessibility are beneficial to the customer, but the purpose of these benefits is to increase deposits to the bank.
Benefits
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A money market account offers several advantages over a regular checking or savings account. Checking accounts are non-interest-bearing and traditional savings accounts offer only a low rate of return. A money market account combines the ability to write a limited amount of checks with the ability to earn interest like a traditional savings account. Money market accounts are also FDIC insured, and the underlying investments are normally safe corporate and government bonds.
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Considerations
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A money market account, like any other banking account, must be evaluated carefully. Most have minimum balances that can range from a minimum of $500 to several thousand dollars. Liquidity must be considered since money market accounts are far more restrictive in the number of monthly transactions that are allowed on an account. Traditional checking and savings accounts offer unlimited transactions and generally have either no minimum balance or very low minimum-balance requirements.
Warning
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Requirements regarding minimum balances and the number of monthly withdrawals for money market accounts vary from bank to bank. It is critical for the account holder to become familiar with these policies and follow them explicitly. The penalties and fees for non-compliance can quickly total more than any benefit gained from a higher rate of return. If minimum balance requirements or accessibility is a concern, a banking customer should consider a regular checking or savings account instead.
Tips
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Money market accounts offer a wide range of interest rates and features. It is advantageous to check with several local or national banks to find the best terms for the individual account holder. For many people, interest income is most important. Others may desire a lower opening balance requirement or greater accessibility to their money. Shopping for a money market account should be no different than searching for a bank when opening a traditional savings or checking account.
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References
- Photo Credit a night depository at a local bank image by palms from Fotolia.com
