Right now, we’re still in a low-rate environment. For savers, that results in a great deal of frustration. In the quest for better yield, many savers are turning to money market accounts. These accounts often offer slightly better rates, but you do need to be aware of the fact that you might see increased restrictions.
A money market account is a bank account in which the yield is tied to the current money market rates (hence the name of the account). A money market account is a deposit account, so if you open this type of account at a financial institution insured by the FDIC or NCUA, your money is protected in the event of failure.
Many financial institutions offer money market checking accounts and money market savings accounts. Money market checking accounts usually have lower yields than what you find on savings accounts, since you will be able to engage in unlimited transactions with these accounts. Money market savings accounts, though, are subject to monthly withdrawal limits imposed by the Federal Reserve’s Regulation D. Even though many money market savings accounts come with check-writing privileges, you need to be aware of the withdrawal limits so that you don’t end up penalized (or having your account revoked).
A money market savings account might come with a higher yield than a “standard” savings account offered by the institution. This can be helpful for savers who just want to squeeze a little more from their accounts.
While not every money market account comes with restrictions and requirements, many of them do. It’s common to find money market accounts that require minimum initial deposits. Additionally, you will likely have to maintain a certain balance in order to avoid paying a monthly fee. (Some financial institutions waive the balance requirement if you have a large relationship with them, such as a loan, or if you direct deposit a certain amount each month.)
Additionally, there might be a tiered yield structure. You might receive a different yield, depending on how much money you have in the account. So, while the account might advertise a 1.5% yield, you might need to keep $5,000 or $10,000 in the account in order to get that amount. Also, watch out for institutions that cut your rate again once you build up the account. You might find that holding $25,000 or $50,000 results in a lower yield.
Make sure you read all the fine print, and that you understand how the account works before you sign up. You don’t want any unpleasant surprises once you start saving.
It’s vital that you understand the difference between a money market account and a money market mutual fund. Realize that money market mutual fund is an investment product. It is not FDIC (or NCUA) insured. This means that you can lose the capital you put in.
Many money market mutual funds also come with limited check-writing privileges, so it can be confusing to some consumers — especially if the money market mutual fund is offered by the banking institution. However, it’s important that you make the distinction if you want to keep your money safe from capital losses (real losses, due to inflation, are another matter entirely).
Before you finalize your account, make sure that you understand what type of account you have. If you are looking for a money market account as a savings vehicle or emergency fund, make sure you don’t end up with a money market mutual fund.
A money market account can be a reasonable choice for savers looking for a little extra yield. Not all money market account rates are competitive, though, so it’s important to shop around. The right money market account can provide you with decent enough yield, and sufficient flexibility as a place for your emergency fund. Finally, make sure you understand what you are getting. While many investors do like money market mutual funds, if you aren’t interested in that approach, make sure you are getting the FDIC insured account.
Photo credit: Doctorwonder.