How Money Market Accounts Differ From Savings Accounts and Certificates of Deposit

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Are money market accounts beneficial? Much like any other type of account, the most important thing is that you earn interest over time, which brings more money into it as a type of reward for resisting temptation and not withdrawing during a certain period of time.

Money market accounts are specific types of accounts that acquire a bigger amount in interest compared to other account types, such as savings accounts and certificates of deposit. They also offer privileges such as checks and debit cards. However, they are less flexible than savings accounts and bear higher fees for monthly maintenance and other expenses tied to the account.

Just the Nuggets

  • Money market accounts represent a long-term commitment to your savings with significantly higher interest rates.
  • They come with some attachments including the minimum deposit amount, minimum monthly balance, and different types of fees.
  • Money market accounts are insured up to $250,000 for an individual account and up to $500,000 for a joint account.
  • Considering that the financial institution is rewarding the clients with high interest rates and other benefits, there are some strings attached to it. The most important one being the transaction limitation per month.

How Money Market Accounts Work

Money market accounts give you a certain boost to your original savings amount through interest, much like the other account types including savings accounts and certificates of deposit. They are beneficial and crucial for your financial success since they are the easiest way to boost your profits without doing any legwork. They can be opened in any financial institution including a bank or a credit union. These institutions usually have a predetermined minimum deposit amount that you’ll have to make before being eligible to open a money market account. In addition, you’ll also have to maintain a minimum account balance each month, as well as pay a monthly fee for the maintenance of your account and other standard charges.

One of the most important benefits of a money market account is the fact that its funds are always guaranteed under federal protection. In the United States, the Federal Reserve—the central bank of this country—insures for amounts up to $250,000 per bank. This means that you could open another account with the same amount as another financial institution and be guaranteed the same protection as the first one. The Federal Reserve has even established a separate regulatory and financial protection authority for this purpose called the Federal Deposit Insurance Corporation (FDIC).

In addition, joint accounts of this type are insured with the same type of protection in the amount of up to $500,000. Other benefits of having a money market account include higher interest rates, as well as debit cards and check writing privileges.

However, it should be noted that there is a limitation when it comes to the transaction amount, as well as the transaction frequency. Also, this type of account draws an entirely new set of requirements such as fees you’ll need to cover each day. They differ from one financial institution to another and should be listed in their policy.

How to Open a Money Market Account

Opening a money market account is quite similar to opening a savings account. All the basics are the same—you deposit a certain amount of money into your account and watch your profits grow over time by earning interest. You can also retrieve your money from it whenever you wish, without worrying that you’ll somehow be fined through lower interest rates, penalties, or other attachments like you would with a certificate of deposit.

Generally, the main reason for such admirable interest rates available with a money market account is the fact that you are committing to honor restrictions imposed by the bank or a credit union which are usually not required with other account types. Also, the bank will use your funds to loan other clients or make investments in the stock market, for example. This is the standard requirement you are agreeing to when opening a money market account.

Choosing the Best Money Market Account

There are several things you should consider when deciding on opening a money market account. Namely, different financial institutions allow you to open this account under certain requirements and conditions you’ll need to satisfy first. This depends on what you want to achieve with this account, i.e. how long you want to keep it, how much money you’d want to put into it, etc.

Here are some things to consider before opening an account, regardless of your personal goals and desires with it:

1. Interest rates

It goes without saying that the higher interest rates will bring you higher profits over time. Also, you should consider other benefits included in a bank or credit union’s money market account opening offer, such as first deposit cash bonuses. You should ask yourself the following—why would a bank give me such high interest rates? What does it want in return? Can I meet these requirements?

2. Fees

Different banks and credit unions require different fees for you to pay for your account maintenance, as well as the minimum balance requirement you’ll have to fulfill each month. After all, a money market account is a long-term commitment, so you should be able to look way ahead in the future and be prepared to pay these fees each month.

3. Transaction restrictions

As with any other account type, there are some restrictions when it comes to making withdrawals. For example, you’ve opened an account but suddenly something happens and you wish to retrieve your money from it. This would imply that the account will stay empty or with a significantly less amount of funds than you signed up for in the beginning. This would result in a huge loss of resources and effort for the bank. To prevent this from happening, the financial institutions have imposed a limitation when it comes to the number of transactions you can make from your money market account each month.

Should You Open a Money Market Account?

You should focus on the list of reasons why a money market account may be the best choice for you. Each client wants to achieve something different with their funds. After all, this is why the different account types were created. 

So how can you tell if a money market account is right for you?

A money market account is quite useful for people who tend to have a rainy-day fund that they never touch under any circumstances. These funds could benefit from being kept in a money market account since they can earn interest over time. A money market account is a good way for you to have access to your funds but through a limited number of transactions. This way, you are basically halfway between a savings account and a certificate of deposit. While the first allows you to withdraw money whenever you wish, the other one will charge you if you do so before the expiration date.

Money Market Accounts vs. Savings Accounts

The huge gap between these two account types comes from the difference in the interest rates they provide for the funds on them. Namely, these rates are proposed by the central banks of the respective countries, so there is not much that the financial institutions can change in relation to these demands. However, there is another clear difference between these two—the number of withdrawals you can make from them.

As mentioned above, the banks wouldn’t have any use of your money market account if you keep withdrawing money from it. That is the sole purpose of the higher interest rates—to help you resist this temptation. So, while you can withdraw money from your savings account whenever you feel like it, the money market accounts usually have this option limited to 6 times per month.

The main difference, however, is conducted in the term of APY. APY stands for Annual Percentage Yield, and it shows you how much your money market account can earn interest each year.

Money Market Accounts vs. Certificates of Deposit

When compared to certificates of deposit, the money market accounts seem to be founded on a lot of looser ground. Namely, the certificates of deposit do not allow you to withdraw your money under any circumstances during a previously determined period of time (typically 6, 12, or 18 months). In case you do so, you will be subjected to a quite high penalty.

So, what is the benefit of this account type? 

Unlike any other accounts, certificates of deposit have a fixed interest rate. They are federally insured as well, which makes them similar to the money market accounts. However, the main distinction is in the fact that certificates of deposit have quite a long list of limitations.

Money Market Accounts vs. Checking Accounts

Money market accounts are actually a lot more alike to checking accounts rather than savings accounts. The main reason for it is in the ability to use checks and debit cards, which are usually attached to this account type. The most evident difference between these two types is in the ability to withdraw money from them. While checking accounts have an unlimited number of times per month during which you can withdraw your money, the story is a bit different with money market accounts.

Since you are committing to keeping your money in your account, the bank is able to use that funds to give out loans to other clients or reinvest it into the stock market—hence the name of the account. Because of this, the money market accounts are usually tied to around 6 transactions per month.

Closing Notes

Money Market AccountVariableYesLimitedYesSix
Savings AccountVariableYesNoNoLimited
Checking AccountVariableYesUnlimitedYesUnlimited
Certificate of DepositFixedYesNoNoZero

Money market accounts are a good way to pile up a significant amount in interest for your savings. This account type brings the highest interest rates in comparison to others since it also comes with some specific strings attached. For starters, when you put your funds into the hands of a financial institution, they will use it to fund loans or reinvest into thriving markets such as the stock market. Also, the money market accounts have a lot of benefits similar to the checking and savings accounts, such as the check-writing abilities and the use of a debit card. Otherwise, it is quite similar to other account types, so all you need to do is learn your preferences to choose the most suitable one.

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