How does a money market account work?


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A money market account is a type of financial product that allows you to securely store your funds while earning interest. Money market accounts combine some of the best features of a checking account and a savings account. You can open these accounts at banks and credit unions.

How do money market accounts work?

When you open a money market account, you deposit some money and start earning interest. You may need to deposit a certain amount to open the account, but you are free to add or remove from the account, as long as you maintain the minimum balance requirement.

Money market accounts pay a variable rate of interest, which helps you get the most out of your money. It is common for these accounts to have tiered rates, meaning that higher balances are rewarded with a higher Annual Percentage Return (APY). Money market accounts tend to offer higher returns than conventional savings accounts.

Money market accounts are similar to savings accounts, but they have certain transactional characteristics like a checking account. For example, a money market account may be accompanied by a debit card and checks. However, money market accounts are still limited to six monthly withdrawals, just like savings accounts.

What are the advantages of money market accounts?

  • Your money is safely insured: The money you put in a money market account is insured for up to $ 250,000 per account holder and $ 500,000 for joint accounts at banks and credit unions that are federally insured.
  • You can get competitive returns: Money market accounts pay competitive interest rates. Take a look at the best money market accounts to see current rates.
  • You will have more ways to access your money: Money market accounts may be accompanied by a debit card and / or checks.

What are the disadvantages of money market accounts?

  • They may have high minimum deposit requirements: A money market account will generally require a considerably larger deposit than a savings account. It is not uncommon to see accounts requiring $ 1,000 or even up to $ 25,000 to open.
  • You will have limited access to money: Due to a federal rule, you generally cannot make more than six withdrawals per statement cycle. This also applies to savings accounts.
  • You can find higher returns elsewhere: While money market accounts can often offer a higher return than a savings account, this is not always the case. Be sure to shop around and compare your options.

Who should have a money market account?

It depends on your goals. Let’s say you are building your emergency fund. A money market account could be a good place to store this money. But if you are saving for your long-term retirement, another financial vehicle may be more suitable.

“A money market may be appropriate for money that you don’t need right away, but neither is it appropriate for a long-term need that you might invest in,” says Charles H Thomas III, CFP, founder of Intrepid Eagle Finance. “Something like an emergency fund or a rainy day fund might be a suitable use for a money market. “

Can you lose money on a money market account?

You cannot lose money in a money market account if you are working with a financial institution that has the proper insurance. With federally insured banks or credit unions, your funds in a money market account will be protected if the financial institution goes bankrupt.

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