What is a Money Market Account?
Everyone wants to save money, but not everyone knows how or where to get started. If you plan to rely on a savings or checking account to build equity, you’re probably losing money because the interest rates on those accounts are generally lower than with a money market account. You need something that is low-risk and has higher interest rates so you can build up your savings.
How Does a Money Market Account Work?
A money market account functions like a savings account where you deposit your money and earn interest based on the account balance. The key difference between a money market account and other accounts is the saving money, not spending money.
Difference Between Money Market Funds & Money Market Accounts
While appearing similar in goal and name, money market funds and money market accounts are two distinct options when looking for ways to save money.
- Money Market Funds – Money market funds offer higher returns due to slightly higher interest and can provide tax-free earnings, but are riskier and carry no guarantee of principal.
- Money Market Accounts – Money market accounts can be insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder. This makes the accounts a low-risk option for those looking to save money without having to spend it.
Comparing Money Market Accounts to Savings Accounts
If you need an option to help you save money, both savings and money market accounts are good choices. Both offer a safe place to store money while it earns interest.
The difference starts with how much interest you’re earning on your account balance. Money market accounts have an advantage by offering higher interest rates when compared to savings accounts. But keep in mind, the interest earned on the account is considered taxable income.
Money market accounts also provide more transaction options like check-writing. But, again, don’t think of this account as something to constantly take money out of. In addition to possible withdrawal regulations, some financial institutions carry a minimum balance requirement that can incur fees if not maintained.
Depending on the institution, there may be monthly fees as well, which can usually be waived if regular monthly deposits are made to the account.
Comparing Money Market Accounts to Certificates of Deposit (CDs)
Certificates of Deposit are great for those people who do not need immediate access to money. Your funds will be locked in a predetermined amount of time. If you need to remove funds from a CD before the term ends, you’ll incur a penalty.
Money market accounts, by contrast, have more freedom for those needing liquidity with no penalty.
The interest you earn from either account will depend on the market. CDs, generally, offer a fixed interest rate that’s higher than money market accounts. But money market accounts use a variable interest rate that fluctuates over time as market conditions change.
Both options have minimum balance requirements with CDs being easier to maintain since you’re not supposed to be withdrawing funds from the account before the term ends.
How to Make the Most of a Money Market Account
The most important thing to do is determine how you’ll be funding your money market account on a consistent basis. Your goal should be to maintain the minimum balance requirements to avoid any fees. This can be accomplished by setting up automatic transfers and direct deposits to keep the account balance consistent.
Once you have the account, monitor interest rates offered by various financial institutions. Compare them regularly and consider transferring funds to maximize your returns. Not-for-profit institutions, like credit unions, offer lower fees and higher interest rates to their members.
When your account starts earning interest—since money market accounts provide better access to your funds with a checkbook or debit card—you can start using it to fund some short-term goals.
What are the Best Ways to Use a Money Market Account?
Money market accounts serve their holders best by providing funding for short-term goals or any larger purchases where you need cash readily available. These include:
- Building an emergency fund – The liquidity of a money market account means you can access the money quickly if you run into any financial surprises. Your goal should be to save at least three to six months’ worth of living expenses.
- Building a savings account for a down payment on a major purchase – Higher interest rates mean you can earn more when compared to a savings account, which allows you to put that money towards a down payment on a car or house.
- Funding a vacation or traveling – Because you’re earning while saving, you’ll have extra cash to put towards something and can access it with a debit card or checks.
- Starting a business – A money market account can help you build capital for a start-up.
What are the Worst Ways to Use a Money Market Account?
For any long-term financial plans or frequent spending, there are other account options that would function better than a money market account.
- Savings for retirement – 401(k) contributions can reduce your taxable income, and some employers will match those contributions.
- Day-to-day spending – Money market accounts are not a replacement for checking accounts. There are transaction limits because the accounts are designed for you to save money vs. frequently spending it.
Opening a Money Market Account
If you’re focused on saving money with no plans to spend it right away, but still want the comfort of knowing you’ll have full access to it, a money market account could be right for you. At Community First Credit Union, we have many options for savings accounts, money market accounts, IRAs, and CDs. You can view our current rates or open an account today.