Money Market Account

A Money Market Account Primer

A money market account, or money market deposit account (MMDA), is a type of bank account that prescribes strict rules regarding balance size and the number of withdrawals that can be made each month. In exchange, banks typically confer interest to money market account holders at a higher rate than what is paid to holders of other account types.

A money market account is a form of savings account. When consumers open a money market account, they are typically required to maintain a relatively high balance (ranging from several hundreds to several thousands of dollars) at all times and are usually allowed to make only a small number of withdrawals per month (typically around six). Because these rules result in higher and more stable account balances, banks are able to more easily re-invest the monies in these accounts for profit. In exchange, banks confer higher rates of interest on money market accounts than on most other types of accounts.

Interest rates, minimum balances, and restrictions on withdrawals vary from bank to bank and sometimes within banks, as more than one variety of money market account is typically offered. For example, a financial institution may offer a basic money market account that requires a minimum balance of $1,000 but pays relatively low interest. It might also offer a money market account with a minimum balance of $5,000 and an interest rate that increases incrementally as an account holder’s balance rises. Finally, it might offer a money market account that is linked to an account holder’s savings, checking, or other account type.

Depending on the amount of money a consumer wishes to deposit and the plans for those funds, there is probably a money market account that will meet his or her needs. It is strongly advised, however, to understand all of a bank’s different offerings and terms before selecting a money market account.

Money market accounts offer financial benefits through both interest payments and added liquidity (the ability to convert account balances into cash easily). This combination allows them to function as an important tool in the financial life of individuals, families, and businesses.

At one end of the financial scale, a basic checking account extends little if any financial gain, since most checking accounts do not pay interest. However, this is offset by an extremely high level of liquidity. At the other end of the financial scale, stocks offer the prospect of larger financial gain but a comparatively low level of liquidity since equities generally require investment over the long-term to outpace the gains made by other financial instruments.

Money market accounts fall somewhere in between the two ends of the scale. For consumers who do not require access to their money right away but expect to need it within a year or so, a money market account may be the ideal instrument for investing accumulated savings.

Financial planners generally suggest, moreover, that individuals and families always have enough funds available (that is, saved in a form that offers a high level of liquidity) to support themselves for three to six months in case of emergency. Money market accounts are among the most sensible places to cache such funds, since they offer sufficient liquidity to deal with any financial demands caused by emergencies while accruing interest on the monies until they’re actually needed.

Money market accounts also come with the protections of the Federal Deposit Insurance Corporation. The FDIC, a government agency responsible for guaranteeing the stability of banks nationwide, insures money market account balances up to $100,000. In other words, consumers who open a money market account with a bank that becomes insolvent are still guaranteed the full value of their balance as long as it does not exceed $100,000.