A money market account combines the features and benefits of a savings and checking account, providing convenient access to your deposits while earning more interest than a traditional checking account. While the average interest rate for an MMA is 0.13% according to CNET’s sister site Bankrate, it is possible to find interest rates 15 times higher at some banks or credit unions. Unlike savings accounts, an MMA limits the number of withdrawals per month – traditionally capped at six – and pays a tiered rate based on account balance. The higher the balance, the more interest your account will earn.
A brief background on call money accounts
Money market accounts were created in the 1970s by Henry BR Brown, an engineer turned money manager, and his assistant Bruce Brent. They developed the MMA concept to attract smaller investors and bypass large investment requirements in order to access higher interest rates available on Treasury bills. Back then, the minimum investment requirement started at $100,000 — leaving most retail investors out. He pooled smaller accounts from multiple investors to achieve higher minimum investments and created the Reserve Fund.
Fast forward 50 years to the present to see that MMAs are well known financial products offered by most banks and credit unions. You earn a variable interest rate, the market interest rate – hence the name “money market”. These accounts are considered safe investments because they are insured by the Federal Deposit Insurance Corporation if offered by a bank, or the National Credit Union Administration for credit unions for amounts up to $250,000.
This is how a money market account works
A money market account is a type of savings account that offers features commonly associated with a checking account. Many MMAs have a higher minimum deposit requirement than a savings account and limit the number of withdrawals allowed per month. Like a checking account, a money market account offers owners the ability to access funds through debit cards or checks.
The interest earned from an MMA is variable – meaning it fluctuates in response to market conditions. As the federal reserve modifies the prime rate, banks increase or decrease the rates offered on deposit products. In addition, a money market account may also offer a tiered interest rate, meaning that the higher the account balance, the higher the interest rate applied to the balance.
In exchange for the higher interest rate, a money market account limits access to available funds. Prior to 2020, the Federal Reserve limited the number of transactions on MMA to a total of six transactions per month. Although regulations have been changed to remove this restriction, many banks still impose the restrictions.
How to open a money market account
Opening a money market account is a straightforward process.
- Compare money market account features to ensure you choose the account with the most favorable benefits. Features, benefits, and limitations vary by industry. Please pay attention to the following:
- interest offered
- Minimum deposit required
- Minimum monthly balance required to avoid service fees
- Restrictions on Access to Funds
2. Once you have selected a bank or credit union, fill out an application.
3. Confirm your identity.
4. Fund the account with at least the required minimum deposit.
How does a call money account differ from a savings account or a deposit confirmation?
A call money account differs from a conventional savings account in two key respects:
- A money market account offers debit card access and check writing privileges as a method of accessing deposited funds. Savings accounts generally offer electronic funds transfer access or an ATM card. Debit cards differ from ATM cards in that they can be used at payment terminals.
- A money market account also generally limits the number of money transfers or withdrawals per month and requires a minimum balance to avoid monthly service fees.
There are also some differences between an overnight deposit account and one deposit receiptor CD.
- A CD is bought with a term of typically three months to five years. However, some banks offer shorter or longer terms.
- A CD is intended to promote medium to long-term savings. A CD restricts access to deposited funds by imposing a prepayment penalty if funds are withdrawn before the due date.
- With a traditional CD, no additional funds can be deposited into the account once it is set up. A money market account does not restrict additional deposits after opening the account.
What is the difference between a money market Account and a money market fund?
A money market fund is a type of mutual fund that invests in short-term debt securities such as government bonds, cash and cash equivalents. Investors buy stocks and receive returns in the form of capital gains. Money market funds are considered low-risk investments but are not insured by the FDIC.
Are money market accounts safe?
A money market account is considered a safe, low-risk investment if issued by a bank or credit union that is insured for up to $250,000 by either the FDIC or NCUA.
How to choose the best money market account
When opening an MMA, you need to compare several features before deciding which is the best.
- What are the minimum deposit requirements? This will help you decide if an account will work with your savings budget. Also note any minimum balance requirements to avoid service fees. Such service fees are detrimental to revenue growth and should be avoided whenever possible.
- What interest rate does the account bring? It’s important to search accounts nationwide to find the best rates available. With the proliferation of online banking options, geographic restrictions are not necessarily a barrier to finding the highest interest rates.
- Make a note of any charges associated with the account. It is important to understand any fees and restrictions that may result in penalties to ensure your account growth is not impacted.
Advantages and disadvantages of an overnight money account
advantages
- A money market account is considered a low-risk investment because it is insured for up to $250,000 by either the FDIC or the NCUA, which can pay a higher interest rate than traditional savings accounts.
- It offers debit card and check issuance access to deposited funds.
- Additional money can be deposited at any time.
- Higher balances bring higher interest rates for accounts operating on a tiered model.
- Most banks and credit unions offer MMAs through digital banking services, so accounts and benefits can be compared across the country to find the best deals.
Disadvantages
- Transactions are usually limited to six per month. Under the excessive transaction rule known as Regulation D, most MMAs are limited to six withdrawals per month (which extends to overdraft protection transactions, third-party payments, electronic and phone transfers, and ACH withdrawals). Regulation D was suspended in 2020 and some banks have removed these limits on withdrawals; However, there are banks that still charge fees for exceeding the withdrawal limit.
- An instant deposit account has higher initial deposit requirements than savings accounts.
- Service fees may be charged when balances fall below a target level.
The final result
Money market accounts have the same characteristics as savings and checking accounts. They typically offer higher interest rates than checking accounts, but offer debit card and check-writing access to deposited funds. Money market accounts are best suited for savers who are looking for safe, low-risk savings options and have enough funds to meet higher initial deposit requirements. These accounts are best for short-term savings for those who don’t need to make many monthly withdrawals.
