Define Money Market Deposit Account (MMDA)
In the wake of the Great Depression that devastated the United States economy, many new types of banking emerged. One of these is the money market deposit account, or MMDA. There are both benefits and disadvantages to an MMDA, and investors should evaluate their financial situations before deciding whether to open one.
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FDIC
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The Federal Deposit Insurance Corp., or FDIC, was created in 1933 as an answer to the Great Depression. Since the introduction of this federal agency, no one has lost money in a U.S. bank account, because every account in every federal bank is insured up to $250,000. However, this amount of coverage is temporary. By the end of 2013, this amount is expected to return to the normal $100,000. The FDIC covers only accounts that are deposit-based, such as savings and checking accounts.
Banking
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There are a number of types of banking in the United States. The most common is the checking account. The checking account is an electronic account of your money you invest in the bank. The checking account typically pays little or no interest, but your bank will often let you have a checking account and deposit and withdraw funds free of charge.
A second type of investment is the mutual fund. Mutual funds, partial investments in companies, are rather high-risk and are not covered by the FDIC. However, many people prefer investing in mutual funds because they can have high interest rates.
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Money Market Deposit Account
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A third type of banking account is the money market deposit account. The money market deposit account should not be confused with the money market fund, which is a type of mutual fund. It is similar to a checking account, and is offered by many U.S. federal banks. Although checking accounts are typically safe and lackluster, money market deposit accounts offer interesting investment opportunities for people of all ages.
Advantages
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FDIC insurance is one benefit of a money market deposit account. There are many benefits to a money market deposit account. For one, it is insured by the FDIC. Many investors feel safe using an MMDA, knowing that their money will be refunded in an economic crisis.
A second benefit is that these accounts typically pay higher interest than regular savings accounts. This should allow a greater accumulation of wealth over time.
A final benefit of a money market deposit account is that only a certain number of checks can be written per month. This enhances an account's security. If account information is stolen, the bank will automatically reject checks after a certain point, even if the owner is unaware that someone is trying to drain money from the account.
Disadvantages
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There are also disadvantages to money market deposit accounts. They pay lower interest rates than money market mutual funds do. And the monthly limits on the number of checks and transactions discourage people who make numerous transactions for bills and purchases.
A third disadvantage is that you are charged fees for having this type of account. When compared to checking accounts, a money market deposit account may be a financial burden.
A minimum balance is required, which might be hard for some people to maintain in times of crisis. Also, interest is tiered on MMDAs, so you might not get the best interest rate unless you have a large amount of money in the account.
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References
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