Understanding Money Market Accounts: A Comprehensive Guide

A money market account is a type of deposit account that pays interest, but it works differently than other types of saving and investment accounts. You can write a limited number of checks for convenient spending, but you may need to maintain a high balance to earn interest.

Key Terms to Know About Money Market Accounts

Whether you’re looking for a safe place to save money or an account that offers a competitive interest rate, familiarizing yourself with some key terms associated with money market accounts can help you avoid fees and maximize your earnings.

Annual Percentage Yield (APY)

The APY is a percentage that represents the amount of interest the account will yield in one year based on the interest rate and the frequency of compounding. APY includes the effect of compound interest, which is interest that’s earned from your deposits as well as interest that’s already accrued. Use APY to compare money market accounts to get a more accurate idea of your earning potential.

Balance Tiers

Many banks offer a variety of interest rates that correspond to a range of account balances, or balance tiers. Usually, higher balance tiers earn more interest. For example, a money market account may offer the lowest interest rate on balances under $5,000, a higher rate on balances between $5,001 and $10,000, and the most competitive interest rate on balances over $10,000.

Banks

Banks are for-profit financial institutions that accept deposits, make loans, and provide other services. Many banks are part of the Federal Reserve system, the central banking system in the United States. Depending on whether they’re chartered at the state or national level, banks may also be regulated by their state bank regulator or the federal Office of the Comptroller of the Currency. Banks offer several types of accounts including checking accounts, savings accounts, and money market accounts.

Compound Interest

Your money market account balance can increase over time with the help of compound interest, or interest calculated on your deposits as well as earned interest. For instance, if you start with $100 and earn 5% APY, in the first year, you’ll earn $5 and have a balance of $105. Assuming you make no additional deposits, in the second year, you’ll earn $5.25 and have a balance of $110.25. Note that for most money market accounts, interest compounds daily or monthly.

Credit Unions

These not-for-profit financial institutions provide banking services to members, who are also part owners in the credit union. Because credit unions return profits back to members, money market accounts offered through credit unions may offer higher savings rates. Membership in the credit union is required to open a money market account. You may be able to join a credit union based on employer, family, geographic location, or membership in a group.

Excessive Transaction Fee

If you make certain types of transactions from your money market account more than six times in a month, you may be charged a fee. This transaction limit usually applies to pre-authorized, automatic withdrawals like overdraft protection, transfers made by check or debit card, and telephone transfers and withdrawals.

Federal Deposit Insurance Corp. (FDIC)

The FDIC automatically insures eligible money market accounts at member banks and other financial institutions. If the bank fails, bank deposits are insured for up to $250,000 per depositor for each deposit ownership category. Ownership categories include:

• Single owner
• Joint account
• Certain retirement accounts
• Revocable trust account
• Irrevocable trust account

Inflation

Inflation describes the general increase in the price of goods and services over time, which leads to a decrease in purchasing power. Inflation should be considered when investing in a money market account since the interest earned may not keep up with the rate of inflation. You may effectively lose purchasing power if the inflation rate is higher than your money market account APY.

Interest

Banks pay their customers who have deposit accounts, like money market accounts, in the form of interest. Interest is calculated periodically based on your balance and interest rate, then added to your account balance. Interest rates, and thus interest paid, can fluctuate on some accounts, often based on the federal funds rate.

Minimum Balance Requirement

You may be required to maintain a certain balance to earn a specific interest rate or avoid fees. Minimum balance requirements vary between financial institutions—some do not have a minimum balance requirement—and may change periodically.

Minimum Initial Deposit

Some financial institutions require you to deposit a certain amount to open a money market account. The minimum initial deposit may vary among financial institutions. Some may not have a minimum deposit requirement, but may have a minimum balance that’s required to earn interest.

National Credit Union Administration (NCUA)

Accounts at federally insured credit unions are insured in the event of a failure, similar to the FDIC insurance provided on bank deposits. The National Credit Union Administration is the independent agency that oversees the National Credit Union Share Insurance Fund. The Share Insurance Fund insures deposits up to $250,000 per member, per account ownership category, and per insured credit union.

Rate Cap

The interest rate on a money market account may be limited for some financial institutions. The national rate cap is the higher of 75 basis points above the national rate or the federal funds rate plus 75 basis points. The national rate reflects the weighted average on money market accounts with all insured banks and credit unions.

Regulation D

Banks and credit unions are required to follow certain rules when managing deposit accounts. Before 2020, Regulation D allowed account holders to make certain types of transfers from savings deposits and money market accounts just six times per month. While financial institutions are no longer legally required to limit transactions, some still do as a matter of policy.

Service Charge

Some money market accounts charge fees for monthly account maintenance or other services on a money market account. You may be able to avoid these service charges by meeting certain criteria or avoiding transactions that trigger the fee. For instance, you may be able to have the monthly service charge waived by meeting certain criteria like maintaining a minimum balance or having another account with the bank or credit union. Other examples of service charges include overdraft fees, wire transfer fees, and cashier’s check fees.

Finding the Best Money Market Account

Money market accounts provide a low-risk option for short-term savings. You have easy access to your funds and the potential to earn more interest than with a traditional savings account. Plus, deposits are safe as long as you choose a federally-insured bank or credit union.

There are plenty of attractive options available from a variety of banks and credit unions. Compare interest rates, balance requirements, fees, and other account features to choose the best money market account.

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