Money Market 101

Helping Pacific Northwesterners navigate the financial wilderness with simple, honest, uniQue financial insights.

By now you likely know how important it is to save money. Typically most people include a Savings Account or Certificate of Deposit in their savings strategy. However, if you’re looking for an option that will allow you to withdraw money in case you need it sooner than expected, then a Money Market Account might be right for you.

Money market accounts are different and fall into a savings category of their own. A money market account gives you the flexibility of a savings account but with a higher interest rate for a better return on your money.

What is a money market account?

A money market account (MMA) is a specific interest-bearing account offered by a bank or credit union. Sometimes called a money market deposit account, a money market account allows you to transfer money at any time and can be used for overdraft protection. 

Since you don’t have to lock up your money like you do with a CD or retirement account, the cash is available anytime. You can move money into your checking account without penalty and it’s easy to transfer cash online or by using your banking app.

The most crucial difference is money market accounts pay a higher interest rate than most savings accounts. With most money market accounts, the more money you have on deposit, the higher the annual percentage yield.

Money market accounts have some restrictions. For example, there may be a minimum deposit requirement, although many banks and credit unions allow you to open an account with any amount of money. Money market accounts also have a limit on the number of withdrawals you can make each month. Most financial institutions have a limit of five or six withdrawals per month; after this, you incur transaction fees.

Why consider a money market account?

Why would you consider opening a money market account instead of some other type of savings account? There are several reasons:

• A money market account can be ideal for setting aside money for planned purchases or short-term goals. For example, a money market account is ideal for saving for a down payment for a new car or setting aside money for a family vacation.

• If you have trouble saving, a money market account can force you to put money aside. Many banks and credit unions provide scheduled money transfers, so cash is moved from your checking to your money market account every month.
• Unlike investments, MMAs are insured for up to $250,000. Bank money market accounts are insured by the Federal Deposit Insurance Corporation, and credit union money market accounts are insured by the National Credit Union Association.
• A money market account is a great tool to accumulate money to feed other savings strategies, such as CDs or IRAs.
• With a money market account, you always have easy access to your money when needed. A money market account can be a great place to keep an emergency cash reserve.

Although a money market account may not be for everyone, it can be a valuable tool to save for planned expenses, such as quarterly tax payments or a family trip, or so that you have an emergency fund for peace of mind.

What makes a money market account different?

Savings and interest-bearing checking accounts offer many of the same benefits as money market accounts. They all offer interest paid on deposits, and they offer ready access to your money. However, money market accounts do have some unique advantages.

A money market account usually offers higher interest than a savings account or a checking account that pays interest. Compare interest rates with regular savings accounts or interest-bearing checking accounts to see which pays the higher interest rate. It can be useful to have different types of interest-bearing accounts that keep your money liquid.

When shopping for a money market account you want to look for the best interest rate, but there are other considerations as well. Here are some questions to consider:

• Is there a minimum deposit requirement?
• Do the interest rates change based on how much you have on deposit? 
• How many withdrawals can you make each month without paying a penalty?
• How are the dividends calculated? Is interest paid daily, weekly, or monthly?
• Are the interest rates fixed, or do they fluctuate? How often do they change?

A money market account can be a valuable addition to your diversified savings plan. Take a closer look at your saving strategy and see if adding a money market account might be a good idea. If you aren’t sure, the financial professionals at iQ Credit Union are always willing to help. Contact us, visit your local iQ branch, or check out our website to get more details about our money market accounts.