How to Compare Money Market Accounts
Money market accounts are savings accounts that receive a higher rate of interest for deposits. These types of accounts are available at most banks and credit unions. Money market accounts invest in securities that have high liquidity (quick conversion to cash) and short-term maturity dates. These include certificates of deposits, Treasury Bills, commercial paper and municipal notes. Corporations and financial institutions use the money markets to borrow, lend and trade money for short periods--usually under 1 year. Money markets are considered a safe investment, but there are also differences among them that have to be taken into consideration when opening an account..
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Look at the initial minimum deposit requirements. All money market accounts require a deposit of money to open an account. For some, the initial deposit is a few hundred dollars, while many require $1,000 to $2,500. This is an important feature to compare if you have limited funds to invest.
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Check out the maintenance balance to get the higher rate of interest. After you deposit money into an account, you have the option to withdraw funds after 30 to 60 days. But many money market accounts require an investor to maintain a minimum balance in the account to receive the higher interest rate. For some, the minimum must be $500; for other institutions, it could be $1,000 or more.
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Compare the interest rates. The interest rates offered by banks can vary widely. If getting the highest rate available is your main goal, shop around. The interest is compounded daily and is usually paid monthly. Some banks offer higher interest rates solely to lure in more investors.
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Ask if there are levels of interest rates. Some banks and credit unions give a higher rate for larger account balances. For example, with a balance of $2,000, the rate could be 4 percent, but with a $5,000 balance, the rate could be 6 percent. Banks offer these higher rates to entice investors to deposit more money into their accounts.
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Find out if the money market account is FDIC-insured. It is a common assumption that any investment offered by a bank (or credit union) is safe, but this is not always the case. Only banks that are members of the FDIC (Federal Deposit Insurance Corporation) offer their customers this protection on cash deposits. While many banks offer money market accounts, these investments are not usually protected by FDIC insurance. Ask the bank if the account is insured before you invest.
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Find out the number of monthly transactions that are available. Some money market accounts want to limit or restrict the amount of activity in an account each month. For many accounts, an investor is allowed five transactions or less each month. Transactions include withdrawing money, writing checks and transferring money into other accounts.
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Make certain you are researching money market accounts and not money market funds. There is an important difference. Money market funds are mutual funds, a form of investment with more risks. Money market funds are also not insured by FDIC insurance from a bank or SBIC insurance from a brokerage firm.
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