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What is a money market account? It’s a kind of savings account. Like other savings accounts, it allows you to deposit money into the account and then earn interest. It differs from other savings instruments, however, in that the interest rate you earn fluctuates – usually daily – depending on the performance of the money market.
So why prefer it to a traditional savings account, or even a high yield savings account?
In a stable market environment, money market accounts can generally offer higher interest rates (which means higher income for you) than savings accounts. But when markets perform poorly – as they are now thanks to the pandemic – the rate of return suffers.
Right now, a money market account might not offer you a lot of advantages over other savings vehicles, but it’s still worth considering. Ultimately, you need a safe place to store your savings, whether it’s a high yield savings account or a money market account.
If this year has taught us anything, it’s that life is uncertain. “When we think about your overall financial plan, having a cash reserve is extremely important,” says Matthew Shiney, financial advisor at Edward Jones, a Saint Louis-based investment firm.
With unemployment rates at a record, we all see the importance of having money in savings to fall back on when life throws you up. Is a Money Market Account the Right Place to Keep Your Savings? We will take a look.
Traditional savings vs high yield savings vs money market account
Financial institutions want your money. When you put money into a savings account, it usually doesn’t stay there. Instead, the financial institution uses your money and lends it to other people. But do not worry. They must hold reserves to process any withdrawal you request (subject to withdrawal limits).
The real difference between a savings account – both traditional and high yield – and a money market account is how the money you deposit is used. With a money market account, it is invested in money markets or short term loans. As the loans mature quickly, the financial institution gets their money back quickly. The money he earns in a relatively short window depends on the current interest rate he can charge for short-term loans.
When the economy is doing well, there is usually a decent rate. To encourage you to put your savings in a money market account so that you can use it that way, financial institutions return part of the money to you in the form of a higher interest rate.
At least this is the case when the markets are performing well. As Shiney explains, “Money market accounts are more responsive to the overall interest rate environment. So when interest rates rise, their rates tend to rise with them. But as we’ve seen over the past four months, when interest rates go down, money market account rates go along with them.
Money market accounts are a place to store your savings with potentially high interest rates, but the rates fluctuate regularly based on market performance. Also pay attention to account fees.
Today, MMA rates average 0.09% and go up to 1.25%. Traditional savings account rates average at around 0.06%, and rates on high yield savings accounts can go as high as 1.21%.
MMA interest rates are so low right now that they are quite similar to those offered by high yield savings accounts. Kolton kyne, financial advisor associated with Ameriprise Financial, a Minneapolis-based financial planning firm, says that whatever you choose, “it’s a cash reserve, so your goal is preservation of capital.” This means making sure that the money you save keeps up with inflation, whether you deposit it there as an emergency fund or work towards a long or short term money goal. Interest rates are one of the best ways to keep up with inflation.
Money market accounts, like savings accounts, typically allow you to make up to six transactions (including using a debit card or a check attached to the account) per month.
This can be great if you need a bit of cash flow, but it can also encourage you to dip into your cash reserve.
Pros and Cons of Money Market Accounts
Money market accounts offer a distinct advantage, Kyne explains: “a higher interest rate than a savings account”. He adds, “Every time you get a higher potential return on your investment, you take a little more risk. “
What are these risks? Let’s take a look at some of the biggest pros and cons of money market accounts.
|High APYs when markets are doing well||Low APYs when markets are performing poorly (as is currently the case)|
|Liquidity, i.e. the ability to use the money in your account for a set number of transactions each month||You are subject to a limit of six transactions per month|
|Usually deposits up to $ 250,000 are insured by the FDIC *||Some money market accounts require a large deposit to open the account and also have minimum balance requirements|
When to use a money market account
“It’s a weird time for interest rates because everything is so low right now,” Kyne says.
In our low interest rate environment, why do people choose a money market account? Even when these accounts may not offer much returns beyond what you would get with a high yield savings account, a lot of people like them because they serve as a sort of checking and deposit account. hybrid savings.
With a money market account, you get a decently competitive interest rate, even in these uncertain times. In addition, you can use the money in your account for up to six transactions per month. You can also write checks and use a debit card. You can use your money market account to pay your rent or your car loan, for example.
Why the limit of six per month? Regulation D is established by the Federal Reserve Board to protect the reserves of financial institutions.
If you are planning to withdraw from your money market account, be careful. Going over the six transaction limit will usually cost you a fee, and doing so repeatedly may force the institution to close your account.
Additionally, many money market accounts come with minimum account balance requirements. If you withdraw money and drop below the required balance, you also have to pay a fee.
A money market account could be a great place to keep your cash reserves with certain liquidity options. But these accounts also usually come with specific fees. If you are wondering if a money market account is right for you, make sure you can maintain the minimum account balance.
Alternatives to money market accounts
CD vs MMA
You can buy a certificate of deposit (CD) from many financial institutions. You buy it for a set amount of money, giving the institution the funds for a set period (eg, one year, five years). The longer you let the institution keep your money, the higher the APY they will give you for the CD. Once the CD expires, you get your money back, plus interest. CDs may offer slightly higher interest rates than money market accounts, but your money is locked in until your CD matures. If there is a chance that you will need these funds, it is better to stick with another savings option.
High Yield Savings Account vs MMA
We’ve already talked a bit about high yield savings accounts. Currently, their rates are comparable to those on money market accounts. With a high yield savings account, you can’t write checks or use a debit card like you can with a money market account, but you usually get a fixed interest rate and you may be able to open an account with a lower balance. , too much. It is definitely worth comparing these two options if you are considering opening an account to store your savings.
Treasury bonds vs. Mma
Treasury bills are basically like long-term CDs. But instead of buying them from a financial institution, you are buying them from the federal government. Treasury savings bonds take at least ten years to mature. They can offer you a very secure way to earn interest on your money, but they are best used when you can keep your money tied up for a decade or more. On the other hand, a money market account can offer you a comparable interest rate, but you can use your money anytime you want.
Traditional Savings Accounts vs MMA
Traditional savings accounts generally offer you lower interest rates and more cash than money market accounts. Traditional savings accounts are usually linked to your checking account, where you have the option of transferring funds between them in a matter of minutes.
Investment actions against MMA
If you are looking to aggressively grow your money, money market accounts are not profitable at the moment due to their low interest rates. Stocks might offer a much bigger payoff, but they’re also a much riskier investment. This is why you should prioritize saving from a sufficient emergency fund in a more stable account before you start investing in the stock market.
Is a money market account right for me?
If you have savings or plan to start saving, and you aren’t earning at least 1% APY on that money, start shopping for a better rate now. Unless that money is set aside for an upcoming purchase, there is no reason not to increase your income.
Storing your savings in a traditional savings account with minimal interest is wasting the potential of free money you could earn from interest elsewhere. Let your money work for you and put it in a high yield account until you need it. It will earn you high interest rates with minimal risk and relatively quick access to your money.
Opting now between an MMA and a high yield savings account, we recommend the high yield account. You get comparable interest rates without the fees and minimum balance requirements. If you are working on your emergency fund or have only saved a few hundred dollars, the high yield account is your best option.
Whether you choose a high yield savings account or a money market account, you can rest easy knowing that your savings are safe and growing.