How Does a Money Market Account Work?

Posted by MoneySavvy on Jun 6th, 2010 | no comments home title

When it comes to saving money there are so many options. It’s enough to make your head spin. In addition to standard savings accounts there are high yield accounts and there are money market accounts. The latter may be the best option for your current financial goals. Let’s take a look at what a money market account does and some considerations to decide if it’s right for you.

What is a money market account?

A money market account is a savings account first and foremost. It differs from other accounts because it generally offers a higher interest rate to account holders. The interest it pays fluctuates with the prime rate – unlike standard savings accounts which hold steady at a rate of .02% to .07% interest.

A money market account works because the bank requires account holders to meet several specific criteria. These criteria, which we’ll get to in just a bit, mean that the bank has large sums of money that they can hold on to and invest to make more money. Okay, now the criteria for a money market account.

Account holders generally have to make a large initial deposit. This can range from $1000 to $10000 or more.

Additionally, account holders are required to maintain a certain minimum in their account balance. There are fees and penalties for dipping below your minimum balance.

Finally, the number of transactions you process, checks you write or ATM withdrawals and deposits, is limited. There is also generally a fee if you go over your minimum. Why? Because transactions cost the bank money and a money market account is about making money for both you and the bank.

You make money with a money market account by earning interest. The interest is generally compounded daily and paid to you once a month. Generally this amount is deposited right into your money market savings account and reinvested.

The good news is that you can open a money market account at just about any bank or credit union. Check out the interest rates, fees, minimum and initial balances and determine if it’s a good investment for you.

Before you start, determine why you’re opening the account. What are your goals for the account? Is it to save for a vacation? To save for a rainy day or for an emergency?

Why determine your goals first? Because there may be better investment options out there depending on what your goal is. If you’re saving money for a rainy day or an emergency fund, then a money market account makes sense. However, you can get a much higher interest rate if you’re saving for retirement and other longer-term goals.

Money market accounts can be a great way to save money with little to no risk. Evaluate your goals and your options and make the best decision for you. Because you can withdraw the money whenever you need it with no penalty, it’s a great way to set a little, or a lot, aside.