What are money market accounts? We’re glad you asked. A money market account is a blend between a traditional checking account and traditional savings account. These accounts are available at your local bank, credit union, or even with online banks.
Money market accounts tend to offer a greater annual percentage yield (APY) when compared to a checking or savings account. Due to this, it is why so many people elect to keep their money in a money market account.
How Do Money Market Accounts Work?
By and large, a money market account functions just like a checking account. The account owner will have a debit card and checkbook directly linked to this account.
Money can be withdrawn or even directly deposited into this account. There will be some restrictions on how often you can withdraw money, limited to 6x per month, but that is common on regular savings accounts as well.
Can You Lose Your Money in a Money Market Account?
As long as the bank or credit union is FDIC or NCUA insured, all of the money in a money market account is insured up to $250,000. Therefore if the bank went out of business or filed for bankruptcy, the insurance would step in and ensure you do not lose money.
In the event you have more than $250,000 in a money market account, you should likely consider transferring anything over $250,000 to another bank. You can have two different money market accounts, and each account will be insured up to $250,000 — therefore you’ll be sure you do not lose any money!
Are Money Market Accounts Worth It?
Without question, a money market account is a great tool to have in your financial toolbox. These accounts are safe, convenient, and provide interest above and beyond what you’ll receive on a standard savings account. There are some advantages and disadvantages of these accounts, which we’ll cover below.
What Are the Advantages of Money Market Accounts?
What are the pros of a money market account? Let’s review the 3 most common advantages.
Of no surprise, one of the greatest advantages of a money market account is the liquidity these accounts provide. At any time, the account owner can withdraw money from this account (up to 6x per month).
Another advantage is the convenience these accounts provide. Money can be directly deposited into the account, and each account will come with a debit card and a checkbook.
Last but not least, the interest rate one receives on their money market account. Although the interest is not high, and it certainly won’t be high enough to create a stream of passive income, it’s still better than the interest rate you’ll receive on a checking or savings account. Why not earn a few extra dollars for the money you keep in the bank without taking on risk?
What Are the Disadvantages of Money Market Accounts?
On the flip side, let’s dive into some of the downsides of these types of accounts.
Some of the disadvantages of a money market account are related to the various fees one may be faced with. Some banks will charge a fee if the daily average account balance for the month drops below a certain amount.
Other banks have a monthly or quarterly maintenance fee. Before you can determine if the money market account is right for you, be sure to fully understand all of the fees associated with the account.
Although a money market account earns a greater interest rate than a traditional checking or savings account, the opportunity cost associated with your money can be another disadvantage.
For example, your money market account may pay you 0.50% APY, whereas another safe investment may pay you 3% APY. That delta of 2.5% is your opportunity cost, or lost profit when compared to another investment option.
Money Market Account Alternatives
A money market account is just one type of account you can set up at your local or internet bank. There are numerous other options/account types you can choose from which may play a role in your financial picture.
Regular Savings Account
Credit unions, online banks, and traditional brick and mortar banks will all offer regular savings account options. These accounts are insured up to $250,000 as long as the institution is backed by either FDIC or NCUA.
A savings account is a great tool if you’re saving a specific amount of money or saving for a specific purchase. In addition, there are various saving account types. You can allocate some of your direct deposit to automatically be deposited into this account, and you don’t need to link the account to any bills.
High-Yield Savings Account
The age of the internet brought high-yield savings accounts. If you have a high-yield savings account, you can expect your APY to be 20-25x the national average of a standard savings account. With that said, the interest rates on both a high-yield savings account and regular savings accounts are minimal.
Certificates Of Deposit
A certificate of deposit, or CD, is an investment vehicle issued by a bank. A person will deposit money for a specific agreed upon period of time, and the bank will in return pay the customer back via interest payments each year. When the agreed upon time has elapsed, the bank will provide the full principal balance back to the customer.
CD’s tend to offer a higher interest rate, but they are not liquid. The depositor must part ways with their money for that specific period of time. If they needed to access the money, they’d face restrictions and fines.
Regular Checking Account
Most folks will have a regular checking account. A checking account’s primary purpose is to give someone access to all their cash without having to carry the cash in your wallet or purse. Instead, the account owner can access this money by way of their debit card or by writing a check.
Checking accounts are used to pay bills, pay for items at the store, and deposit part or all of your paycheck into. The main downside to a checking account is the minimal interest these accounts earn. Keeping money in a checking account will not appreciate at the same rate as inflation, but it’s better than carrying cash or keeping money in your shoebox.
High-Yield Checking Account
Simply put, a high-yield checking account is the exact same thing as a regular checking account, however these accounts offer a greater annual percentage yield. Generally speaking, these high-yield accounts are predominantly offered with online banks.
These accounts do in fact offer a greater interest rate, but it’s still not enough to generate enough passive income or dividends for a second income stream. Even if you max out the insured value of the account, which is $250,000, a 1% interest rate will generate $2,500/year in passive income.
Trust the Pros
Money market accounts are a common financial tool offered by most financial institutions. These accounts will provide the account holder with a greater interest rate without assuming risk. However, the interest rates on any money market account is still minimal, typically well below 1% per year.
Earning money on your existing money is the key to building wealth. Passive income can help you pay for your cost of living in retirement, help you retire early, and provide you and your family with more financial security.
If you have money to invest, or would like to figure out ways to generate more income, consulting with a financial advisor should be the first step you take. As with most things in life, it makes a positive difference when you work with a professional. Financial advisors are no different. They are professionally trained and educated to help you and your family achieve your financial goals.