Money Market Account (MMA)
A form of savings account with characteristics of a checking account.
What is a Money Market Account (MMA)?
A money market account (MMA) is a form of savings account with characteristics of a checking account, such as checks and a debit card, and the ability to make a limited number of transactions monthly without paying a charge to the bank.
The number of transactions is restricted to six per month because the Federal Reserve still classifies money market accounts as "deposit accounts" (by Regulation D). However, the transaction cap does not include withdrawals made via teller machines and ATMs.
Money market accounts, or MMAs as they are more frequently known, include insurance. It implies that none of your savings will be lost if the financial institution declares bankruptcy or closes its doors entirely.
The National Credit Union Administration (NCUA) offers MMA insurance to credit unions. Like other deposit accounts, MMAs at banks are covered by the Federal Deposit Insurance Corporation (FDIC).
MMAs often offer a greater interest rate than traditional savings or checking accounts, which is one of the most frequent factors people use to decide between the two. However, to qualify for the higher rate, you often need to make a larger initial deposit and maintain a certain balance.
Contrary to MMAs, certificates of deposit (CDs) frequently give significantly higher annual percentage yields (APY), but they need a minimum one-year commitment from the investor.
Although high-interest checking accounts have a greater APY than MMAs, they also have more conditions, such as active management.
Key Takeaways
- MMAs combine features of both savings and checking accounts, offering higher interest rates than traditional savings accounts while providing limited check-writing and withdrawal capabilities.
- MMAs often provide competitive interest rates, allowing account holders to earn more on their savings compared to standard savings accounts.
- Some MMAs may require a minimum initial deposit and maintenance of a minimum balance to avoid fees or penalties.
- Interest rates on MMAs may fluctuate based on market conditions, impacting the overall earnings of the account.
How Money Market Accounts Work
Money Market Accounts (MMAs) are interest-bearing savings accounts that typically offer higher interest rates than regular savings accounts. They provide liquidity with limited check-writing and withdrawal capabilities, making them a low-risk option for short-term savings.
Customers can open MMAs at credit unions, traditional brick-and-mortar banks, and Internet banks. They provide account users with the characteristics of a checking account along with some of the main advantages of a savings account, such as:
- Interest: MMA account holders receive interest on their remaining balances. Typically, the interest rate is higher than that of a conventional savings account. However, it is frequently variable, which implies that it changes as the market changes.
- Debit Cards: Some banks issue customers with debit cards that they may use to make deposits, withdrawals, and transfers at automated teller machines (ATMs).
- Check Writing: In addition to using debit cards, customers could also be able to write checks against the balances of their accounts.
Banks frequently require a minimum initial deposit to start an MMA, and balances must be kept above a predetermined level while operational. If the balance is below that minimum, banks may levy a service fee.
MMAs can be considered by people with short-term goals who wish to earn more interest than they would with a savings account.
So, an MMA could be an innovative solution if you're saving money aside for a specific purchase, such as a trip, a vehicle down payment, or a rainy or emergency fund. However, they are not designed for lengthy objectives like retirement.
Advantages of Money Market Accounts
Modern living can be very pricey. So you know the significance of saving money for significant life events like retirement, paying for education, or purchasing a home.
However, no matter how carefully you prepare, life may be unexpected, and surprises frequently arise along the road. (You probably didn't anticipate the automobile to break down right after you completed paying it off, and surprise! You now need a new one.)
A reserve for emergencies might lessen the impact. It might be challenging to have money for both anticipated and unforeseen costs. More than 40% of Americans in an emergency said they couldn't afford $400.
An innovative strategy to save might be to choose a bank account that can help you increase your money, provide you with easy access, and secure your money in the meantime.
What type of account should you thus keep your money in? Often known as an MMDA, a money market account can be your most excellent option for conserving money.
Weighing the benefits and drawbacks of money market accounts may be a useful starting point for any choice. Before evaluating how a money market account can fit into your financial strategy, take some time to weigh its benefits and drawbacks.
Here are some significant money market account benefits to consider before deciding where to save your money:
1. Safety
Money market accounts may be low-risk savings alternatives, which is a good perk. In addition, the Federal Deposit Insurance Corporation provides insurance for several MMDAs (FDIC). This gives you a safety net since the government will protect your money up to the permitted limitations.
2. Savings rate
Money market accounts can provide more excellent annual percentage rates for savings interest than conventional savings accounts. If so, it may be able to help you earn more than a savings account might.
3. Easy access
When you need money right now, money market accounts might provide you with that option. However, your cash isn't kept secret with an MMA, which might make it a beautiful alternative for emergency savings.
Note
If your dishwasher malfunctions and you urgently need to purchase a replacement, you will know that you may withdraw money without incurring fees, as you could with a CD (certificate of deposit). Just remember that there is a limit of six transactions each month.
4. Flexibility
MMDAs can allow instant access to your money by withdrawing, transferring, or making checks, thanks to online and offline banking alternatives. Even with a debit or ATM card, some banks provide you access to ATMs.
Disadvantages of Money Market Accounts
Before choosing where to store your money, bear in mind the following negative aspects of money market accounts, which are the opposite of those of savings accounts:
1. Balance Requirements
Some banks require a larger minimum deposit to create an MMDA than they would for a checking or savings account.
Additionally, you might need to maintain a minimum balance at all times. If you don't satisfy these conditions, you can be required to pay monthly maintenance costs. Before creating this kind of account, you might consider whether you can afford that minimal amount regularly.
2. Limited transactions
Most MMAs only allow six withdrawals or transfers each month because of federal banking laws. MMDAs are designed to encourage saving; in other words, if you can't withdraw as frequently, you'll wind up saving more.
Note
If you exceed the six transaction cap, you can incur fines or fees. This may be problematic if you need to withdraw additional money immediately but have already made six monthly withdrawals. (That new septic tank can't wait until next month.)
Similar transaction limitations apply to most savings accounts, but no transaction limits are often used for checking accounts.
3. Varying interest rates
Money market account savings interest rates might vary based on the current state of the market's interest rates.
This might be a drawback since the rate could decrease, resulting in you earning less money, or it could also increase (which would be a good thing and could lead to more interest earned). It's challenging because you can't foresee what the market will do.
4. Other growth opportunities
Suppose you don't anticipate using these funds anytime soon. In that case, you might look into alternative saving strategies that provide better returns to keep your money in the bank.
More on the Matter of Interest
Let's go a bit more into the subject at hand: how the interest rates on MMAs—often referred to as annual percentage yields, or APYs—compare to those on other kinds of bank accounts.
As of May 2020, the national MMA interest rate for banks in the United States was 0.15%. This implies that if you deposit, say, $10,000 into your MMA, you would get $15 in interest after the first year.
It will help to compare it to the typical yearly return generated on a conventional savings account. For example, the annual percentage yield (APY) for simple savings accounts used to be much smaller, at about 0.06%.
The APY is expected to be approximately 0.10% in 2020. It implies that after the first year if you deposited $10,000 into a conventional savings account, you would earn $10. Although neither is a significant number, you would get more with MMA.
The average rate on certificates of deposit, often known as CDs, is between 0.40% and 0.60%, making them some of the top-yielding bank accounts (for 1- or 2-year CDs, respectively). The drawback of CDs is that your money is locked up for at least one to two years.
MMDAs provide advantages in terms of liquidity as traditional savings accounts and certificates of deposit (CDs) do not grant check-writing rights or choices for withdrawal - without significant penalties in the case of CDs.
Rates and minimum deposits will vary depending on the institution you choose to use and the region of the nation in which you are located, just as with any account you decide to open. It is best to compare prices from different vendors.
MMAs Vs. Other deposit accounts
Banks and credit unions provide a variety of deposit and money market accounts. Other charges could have characteristics—or even interest rates—that put them on par with or even better than money market deposit accounts.
1. Passbook Savings Account
| Aspect | Money Market Accounts | Passbook Savings Accounts |
|---|---|---|
| Interest | Competitive rates are often higher than regular savings accounts. | Offer interest, sometimes slightly higher than MMAs, to compensate for lack of check-writing. |
| Flexibility | MMAs allow check-writing capabilities, providing easier access to funds. | It may not offer check-writing features, limiting immediate access to funds. |
| Account Requirements | Minimum initial deposit and minimum balance requirements may apply. | They do not require an initial investment or have minimal balance requirements. |
| Insurance | Covered by FDIC or NCUA insurance for deposit protection. | Covered by FDIC or NCUA insurance. |
2. High-yield savings account
| Aspect | Money Market Accounts | High-Yield Savings Accounts |
|---|---|---|
| Interest Rates | Competitive rates, comparable or sometimes lower than MMAs. | Interest rates may be higher than MMAs, depending on the institution. |
| Account Requirements | May have higher initial deposits, minimum balance requirements, and maintenance fees. | Similar account requirements to MMAs, including minimum deposits and balance maintenance. |
| Insurance | Covered by FDIC or NCUA insurance for deposit security. | Covered by FDIC or NCUA insurance. |
3. Regular checking account
| Aspect | Money Market Accounts | Regular Checking Accounts |
|---|---|---|
| Interest Rates | Offer interest, but typically lower than MMAs. | Do not earn interest or have very low rates. |
| Flexibility | Limited check-writing capabilities compared to checking accounts. | Allow limitless transactions, including checks, ATM withdrawals, and wire transfers. |
| Insurance | Covered by FDIC or NCUA insurance for deposit protection. | Covered by FDIC or NCUA insurance. |
4. High-yield/High-interest checking account
| Aspect | Money Market Accounts | High-Yield/High-Interest Checking Accounts |
|---|---|---|
| Interest Rates | Competitive rates, comparable to MMAs. | Offer interest rates comparable to or higher than MMAs. |
| Account Requirements | A minimum daily balance requirement may apply. | Requires a minimum daily balance and may have additional requirements. |
| Insurance | Covered by FDIC or NCUA insurance for deposit security. | Covered by FDIC or NCUA insurance. |
5. Rewards checking account
| Aspect | Money Market Accounts | Rewards Checking Accounts |
|---|---|---|
| Interest Rates | Competitive rates, comparable to MMAs. | Offer competitive interest rates with additional benefits. |
| Account Requirements | A minimum daily balance requirement may apply. | Often require specific activities such as direct deposits or debit card transactions. |
| Benefits | Limited additional benefits beyond interest. | Offer rewards such as cash back, airline miles, or ATM fee reimbursements. |
| Insurance | Covered by FDIC or NCUA insurance for deposit security. | Covered by FDIC or NCUA insurance. |
6. Certificate of Deposit (CDs)
| Aspect | Money Market Accounts | Certificate of Deposit |
|---|---|---|
| Interest Rates | Competitive rates, comparable to or sometimes lower than MMAs. | Offer fixed interest rates that may be higher than MMAs, depending on the term. |
| Account Requirements | Minimum deposit and fixed term requirement. | Require a specific deposit amount and lock funds for a predetermined term. |
| Liquidity | Limited liquidity with early withdrawal penalties. | Limited liquidity with penalties for early withdrawal before the maturity date. |
| Insurance | Covered by FDIC or NCUA insurance for deposit security. | Covered by FDIC or NCUA insurance. |
Conclusion
Money Market Accounts (MMAs) combine the advantages of checking and savings accounts to provide a balanced approach to saving. They offer attractive interest rates, liquidity with restricted cheque writing and withdrawal capabilities, and safety through FDIC or NCUA protection.
Even though minimum initial deposits and balance maintenance may be necessary with MMAs, they provide simple access to capital for immediate financial objectives.
Even with transaction restrictions and interest rate swings depending on the market's state, money market accounts (MMAs) are still a well-liked option for people looking to increase their savings returns without giving up liquidity.
Money market accounts (MMAs) are an excellent instrument for diversifying savings plans. They can be especially helpful for people who want to maximize the profits on their short-term investments while still having easy access to their money.
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