Money market accounts offer a great way to grow your savings while keeping your money close at hand, but come with some restrictions. We take a look at some money market account pros and cons to keep in mind when choosing where to invest your savings.
MONEY MARKET ACCOUNTS: PROS AND CONS
Sometimes you just need a safe and simple way to save money without a lot of strings attached. If you’re thinking of setting aside money for a household emergency fund, a new pair of skis, or a special wedding celebration, a money market account can be a great place to start.
A money market account is a sometimes overlooked cousin of your regular savings account. While it’s a little different in some ways, it’s reliable and really great when you need help with something special—like saving for a better future. Let’s take a closer look.
WHAT IS A MONEY MARKET ACCOUNT?
A money market account is a deposit account held at a bank or credit union that offers a higher interest rate on balances than most checking or savings accounts.
Money market accounts offer the same level of security as savings or checking accounts, but usually limit access to your funds to a maximum of six withdrawals or deposits a month. This allows banks or credit unions to pay dividends at a higher annual percentage yield (APY) on money market deposits.
Different money market accounts are designed to meet different savings goals. At Wasatch Peaks Credit Union, for example, we offer our members a money market savings account with tiered interest rates, meaning you earn more dividends the more you have invested.
HOW DO MONEY MARKET ACCOUNTS WORK?
Money market accounts are deposit accounts similar to regular savings or checking accounts in that your money is “liquid.” This means it can be accessed easily either by using a check, debit card, ATM machine, or by transferring money instantly into your checking account.
Money markets accounts are also insured by the federal government in the same way that other deposit accounts are. Deposits of up to $250,000 are fully protected against loss.
On the other hand, money market accounts aim to offer significantly higher interest rates or annual percentage yields (APYs) than checking or traditional saving accounts. To do this, they generally require higher minimum balances than other accounts and usually restrict the number of times you can withdraw money each month.
ADVANTAGES OF A MONEY MARKET ACCOUNT
Overall, money markets come with some clear advantages over most other deposit accounts held at banks or credit unions. These include:
EASE OF USE
Money market accounts can be opened and managed much like any other deposit account. Most banks and credit unions allow money market accounts to be accessed through their online and mobile banking facilities, by phone, or by visiting a branch in person.
Money market accounts offer flexible terms designed to suit different types of savers. Some, like Wasatch Credit Union, offer tiered interest rates for higher balances to encourage members to build their savings. Others require a single minimum balance in order to earn interest.
By keeping more cash on hand, money market accounts can lend money at a higher rate, meaning that they can reward savers with dividends paid at a higher APY. That’s more money in your pocket every month.
At the same time, unlike most other investments, cash held in a money market account remains immediately accessible to you, subject to withdrawal limitations. You can instantly transfer money to your checking account, withdraw it as cash, or in some cases use it to make payments using checks or an ATM debit card.
Money held in a money market account is insured up to a total of $250,000 per account against loss if your bank or credit union were to fail. Deposits held in banks are insured through the Federal Deposit Insurance Corporation (FDIC), and funds held in credit union accounts are insured through the National Credit Union Association (NCUA).
DISADVANTAGES OF A MONEY MARKET ACCOUNT
At the same time, it is important to be aware of some potential drawbacks of using money market accounts. These include:
HIGH MINIMUM BALANCES
Money market accounts generally require a greater minimum balance than other types of accounts. While many accounts require you to maintain a monthly average balance or only pay interest above a certain threshold, Wasatch Peaks’ Money Market Savings Account pays interest on all deposits, with your APR increasing as you save more.
Most banks and credit unions restrict the number of withdrawals you can make from a savings or money market account to six per month in order to keep funds to support higher interest rates.
Money market accounts also sometimes come with more fees and higher charges than other “higher volume” accounts.
Depending on your bank or credit union, you might pay more in monthly or annual service fees, overdraft penalties, or cash withdrawal charges. There could also be fees to cash checks or replace debit cards associated with a money market account.
WHO SHOULD OPEN A MONEY MARKET ACCOUNT?
The answer is anyone who wants to set money aside from their regular budget in a safe place where it can begin to attract a higher rate of interest. That said, money market accounts are particularly good for certain types of savings.
Building up savings is hard, especially when you are just starting out. Even if you are only able to spare a few dollars a month, then a money market account provides a handy place to stash hard-earned cash until you are ready to invest it in a longer-term savings vehicle, while keeping it close at hand in case of emergency.
SAVING FOR A GOAL
Reward your hard work and careful budgeting by putting a little money aside for something that is just for you—like a vacation with friends, recreational or sports equipment, or a fund to make your wedding day even more special. A money market account is a safe and secure place where your “mad money” can grow in plain sight!
Personal finance experts recommend you save enough to cover your basic monthly costs for 3-6 months to protect you in case of a personal emergency or unexpected expenses like medical treatment or car repairs. A money market allows you to set money aside while keeping it close enough to access in a hurry so you can stay on track financially.
THE BOTTOM LINE
A money market account provides a great place to stash ready cash for the short to medium term. Putting your extra money in a safe place where it can begin to earn interest also helps to protect your earnings from the effects of inflation.
When used as intended, the benefits of a money market account usually outweigh any extra restrictions on your money. Choosing and using a money market account that meets your needs can be a great stepping stone to a better financial future.
WASATCH PEAKS: SMALL STEPS COUNT
At Wasatch Peaks Credit Union we know how important the small steps are to reach your big financial goals. Whether it’s starting a nest egg that will grow into a down payment or a college fund—or simply setting something aside to reward yourself when the time is right—a money market savings account is a great place to start.
- No minimum balance
- Tiered interest payments: the higher your balance, the higher your dividend
- Dividends are computed daily and compounded monthly
- No withdrawal limits
Click below to learn more about the benefits of a Wasatch Peaks Money Market Savings Account, and how to open one today.