When most people think about depositing money in an interest-bearing account, a savings account or certificate of deposit (CD) are two standard options that come to mind. But there’s a third option—a money market account—that may be a better choice for some.
Money market accounts have both pros and cons to consider, and it’s essential to understand how they work before deciding to open one.
Money Market Account Basics
Money market accounts are special accounts that both banks and credit unions offer. They combine some of the best features of checking and savings accounts. Their interest rates are higher than savings accounts, and you can also write checks and make debit purchases from them.
Money market accounts are not meant to be used as your daily spending account. Federal regulations limit the number of transactions you can make from them each month. They also have higher minimum balance requirements than savings accounts.
Whether a money market account is a good option for you depends on your needs. These accounts are best for those who:
● Maintain high balances in their accounts
● Have only a few transactions each month
● Prefer not to lock their money up long-term in a CD
Finally, it’s important to point out that money market accounts are not the same as money market funds. Although they sound alike, the two are very different. A money market fund is a type of mutual fund that specializes in short-term debt securities investments.
How Do You Open a Money Market Account?
Opening a money market account is very easy and can be done in one visit. Depending on the lender, it may also be possible to open an account online. The process is very similar to opening a savings account.
Step 1: Fill out an application
If you already have an account with a bank or credit union, opening a money market account may not take much time, and you may have to show less documentation. Information you will need to provide includes:
● Full name
● Date of birth
● Physical address
● Driver’s license
● Social security number
Additional information or documentation may be required. To save time, be sure to contact your bank or credit union before you visit to make sure you have everything you need.
Step 2: Fund your account
Once your account is established, you can fund it by writing a check, bringing cash, or transferring funds electronically. It may take a few days after your account is funded before you can withdraw or transfer money.
Step 3: Use your account
After establishing a money market account, you may receive checks you can use for making purchases and other things. You may also receive a debit card. It’s also possible to transfer money to and from your money market account.
What Are the Pros of Money Market Accounts?
There are several important reasons why many choose money market accounts over CDs or savings accounts. These advantages may allow you to grow your money faster and still have access to it when you need it.
FDIC or NCUA Insured
The Federal Government ensures the money you deposit in a money market account for up to $250,000. The Federal Deposit Insurance Corporation (FDIC) is the federal agency that insures banks, and the National Credit Union Administration (NCUA) is the federal agency that insures credit unions.
Higher Interest Rates than Savings Accounts
Perhaps the most common reason many opt for money market accounts is that they earn more in interest than savings accounts. This allows you to put your money to work earning more money.
You Have Access to Your Money
With a CD, you can’t access your money for a specific period of time. Depending on the term, your money could be locked up in a CD for years. However, with a money market account, you still have access to your money, and you can make a limited number of transactions from your account each month.
What Are the Cons of Money Market Accounts?
It’s essential to understand the potential disadvantages of money market accounts before opening and funding one. They may not be the best option, for example, for those who will be engaging in frequent transactions.
Minimum Balance Requirements
With a money market account, you usually must maintain a minimum monthly balance. Fees may apply if your account falls below a certain amount. Banks and credit unions have different minimum balance requirements that may range from a few hundred dollars to as much as $10,000.
Limited Monthly Transactions
Unlike a checking account, the number of transactions you can make with a money market account may be limited to six per month. Some financial institutions may not have limits, so it’s best to check before opening your money market.
There May be Maintenance Fees
Depending on the lender, monthly maintenance fees may be charged for some money market accounts. However, these fees may be waived in some cases by maintaining a certain balance.
Is a Money Market Account Right for You?
Money market accounts are great options for those trying to save money for something, like a vacation, a new vehicle, a down payment on a home, or anything else.
These accounts are also outstanding for emergency funds. In the event of an emergency, you can withdraw money without incurring a penalty. The rest of the time, your savings will be growing thanks to compounding interest and an excellent rate.
Choosing the best financial accounts for your needs—whether it’s a checking account, savings account, money market account, or something else—is something you should not rush into.