How Money Market Accounts Work
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Basics
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Money market accounts are federally-insured savings accounts that pay higher interest than a standard savings account. Banks and credit unions typically sell them. The Federal Deposit Insurance Corporation (FDIC) insures bank money markets, while the National Credit Union Administration (NCUA) insures credit union accounts. The normal amount covered in traditional money market accounts is $100,000, although the limit can be raised in times of economic turmoil to protect the institutions from losing deposits. Checks can be written on some money markets. Financial institutions invest funds from money markets in safe vehicles such as short-term loans to government agencies, corporations and other lenders.
Benefits
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Compound interest is paid on money market accounts. Each day the interest earned is reinvested into your account. That interest, in turn, earns more and the full value of all interest earned is paid at the end of each month. Money markets, unlike other investment vehicles, such as money market funds, are very safe. While the interest earned is higher than on a regular savings account, because of the low risk involved, the caps are typically lower than you could earn in a high-risk fund that trades on the stock market. Funds can be withdrawn from money market accounts at any time with no penalty, making them a good source for liquidity.
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Drawbacks
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As part of an investment portfolio, money market accounts earn very low interest compared to mutual funds, stocks and bonds. Money market accounts are not good vehicles for retirement or estate planning, but are better utilized for emergency living funds and short-term savings for upcoming events such as a vacation or home improvement. Many banks and credit unions require a minimum balance, sometimes up to $5,000, to be maintained in a money market. Fees are added when the account falls below that amount, which often are greater than the interest earned. In addition, many check writing money market accounts limit the number of checks you can write to three a month. Consider online banking with a company such as America Net Bank that offers free checking, no minimum balance and interest rates up to 3.10 percent. Online banking is very secure and the FDIC protects the funds. Online banking with Nationwide, a division of Nationwide Insurance Company, offers 2.29 percent interest and requires a $1,000 minimum balance to avoid an $8 a month maintenance fee. They do provide a free ATM card and free transfers between other banking accounts.
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