What Makes Money Market Accounts Different from other Deposit Accounts?
Although it is possible to find an interest-bearing checking account, most checking accounts do not offer interest. A money market account on the other hand, does. In fact, most money market accounts offer a higher interest rate than a traditional savings account. They do typically offer a lower interest rate than a CD would, but unlike a CD, a money market account allows you to withdraw funds as long as you stay above the required minimum balance. In some cases, you may even be able to get a debit card and checks for your money market account. It’s worth noting that some financial institutions may limit the amount of monthly withdrawals you can make from a money market account, so if you do plan to use it like a checking account, you should find one that has no such restrictions. Also, while most CDs do not allow you to deposit funds during the CD’s term, with a money market account you can typically deposit money whenever you’d like.
Like other deposit accounts, funds placed in a money market account at an FDIC insured bank are covered by FDIC insurance. Remember though, that the FDIC coverage limit is $250,000 per depositor, per insured bank. If you plan to have more than that amount in your account, you should consider a bank, like BankFive, that offers supplemental deposit insurance for no additional fee. Such coverage can protect the funds in your account that exceed FDIC limits.
Another thing to be aware of with a money market account is that your interest rate will usually be dependent on the amount of money you have in the account. In most cases, the more money you keep in the account, the higher your rate of return will be. You also must typically meet a minimum balance requirement to open the account and earn interest. Savings accounts on the other hand, usually require a smaller initial deposit and have lower minimum balances than money market accounts. In fact, some savings accounts don't have a minimum balance requirement at all.
What Are the Downsides of a Money Market Account?
Just like any other saving or investment opportunity, there can be potential drawbacks to a money market account. Consider these before deciding if a money market account is right for you:
• Interest Rates Vary. Unlike a CD, where your interest rate is locked in for a specified amount of time, money market accounts are subject to interest rate fluctuations. Just like a savings account, when interest rates fall, so do the returns on your money market account.
• High Minimum Balance. Many savings accounts and checking accounts have a minimum balance as low as $10. The minimum balance of a money market account can range from $100 to $1,000 or more. It is important to be sure you can maintain the required minimum balance before opening the account, so you don’t run the risk of having to pay unnecessary fees, or lose the opportunity to earn interest on your funds.
Considerations When Choosing a Money Market Account
If you want to earn a higher interest rate than a savings account, but still want to retain the level of access to your money that a checking or savings account provides, a money market account might be a good fit for your needs.
But regardless of whether you decide to go with a money market account or another type of deposit account, here are some things to consider:
• Choose a federally insured financial institution. Be sure to check that the bank you’re considering is FDIC insured. The FDIC offers a tool on their website that allows you to look up a bank to verify their FDIC insurance status. Keep in mind though that some banks are actually divisions of larger financial institutions. If you’re having trouble locating your bank on the FDIC’s website, and you believe they are FDIC insured, try searching for them using their website address instead. In addition to FDIC insurance, remember that some financial institutions are also covered by additional deposit insurance. Depending on how much money you plan to keep in your account, that might be a factor worth considering as well.
• Review interest rates. By reviewing account options from few different financial institutions, you can help ensure that you’ll get the best rate of return available to you.
• Check the fine print. Be sure to review all of the terms and conditions of the account before opening it. Take some time to understand any withdrawal limits, fees, or other terms associated with the account.
If you do decide to open a money market account, it doesn’t mean you need to close your existing deposit accounts. A mix of accounts could also be a consideration. For example, if you have a certain amount of money you are confident you won’t need access to in the short-term, you could place those funds in a CD to take advantage of a higher interest rate. Depending on your financial situation, you may be able to set aside additional funds for a money market account, and have another sum of money in a checking account that you can easily access.
For more information on money market accounts at BankFive, and to discuss whether or not it might be a good fit for your financial situation, stop by one of our MA or RI branches, or contact us today.