Understanding Money Market Accounts

Money market accounts are a good alternative to a standard savings account.

A money market account is similar to checking and savings accounts, but is markedly different. Money market accounts are great alternatives to checking and savings accounts and offer many advantages over both types. They are easy to open, offer great rates and many institutions offer no minimum opening amount requirements.

Checking and Savings Account Similarities

Money market accounts are similar to checking accounts because many offer the option of check writing. Most money market accounts allow the owner of the account to write up to three checks per month. They are similar to a savings account because customers deposit money into them for the purpose of saving money.

Types of Money Market Accounts

Money market accounts are broken into two different types: A money market checking account is the most common type; the other is a money market savings account. Both types are money market accounts and offer higher interest rates than standard checking and savings accounts. The biggest difference between the two is that the money market checking account offers the ability for the customer to write three checks per month. Money market checking accounts also pay a slightly higher interest rate than money market savings accounts.

FDIC Insured

Money market accounts are often thought of as mutual funds. They are similar to mutual funds in the respect that they earn a higher rate of interest than standard savings accounts. The biggest difference is that money market accounts are guaranteed by the FDIC for up to $250,000 per depositor. Money deposited into these accounts, therefore, is safe. There is no risk involved when owning a money market account.

Higher Yields

Money market accounts generally pay a much higher rate of interest to account holders. Money deposited into money market accounts is invested in low risk investments by the institution providing it. Owners of money market accounts have restrictions, which vary by institution, of how often money can be withdrawn. This causes the investment to be less liquid than that of a savings account. Money is not free to access at any time, unless owners are willing to pay a penalty. This is the reason banks offer higher rates of interest on these types of accounts. The banks count on having the money for a specific period of time.

Minimum Balance Requirements

Although many institutions require no minimum balance requirements, many still do. It varies by institution on what the requirements are. Some require a minimum opening balance, while others require a minimum balance. All institutions, however, pay interest according to balance and time length. Many institutions also pay a higher rate for a larger deposit. The higher the balance in an account, the more interest the bank is willing to pay.

References

• Essortment: What is a Money Market Account?