They say money makes the world go round. We can’t verify that, but we can tell you that having money and the proper accounts can make your college life more manageable. Here’s the thing, having money is only half the battle. Knowing where and how to invest your funds is key to financial growth. With that in mind, we’re going to cover Money Market accounts, what they are, the pros and cons, and how to use them. Time is money so let’s get right into it.
What is a Money Market Account?
A money market is similar to a traditional savings account because it accrues interest and keeps your money accessible. The most significant difference is how the bank uses your money. A traditional savings account adds to a financial institution’s overall lending power and profit margin. However, money market accounts are invested in a broader financial sector, including virtually anything the institute deems a worthy investment. Because of this, money markets have higher yields based on those investments. Plus, money markets can function as a pseudo-checking account in that you’ll get a debit card, checks, and other payment options.
Here’s the catch, money market accounts, much like CDs, reward you for leaving the money you’ve deposited alone and penalize you if you make too many withdrawals. As per government regulation D, you can’t make more than six monthly electronic withdrawals or payments. Otherwise, you risk hefty fees, and the institute may even close or convert your account.
Many people ask themselves, are money markets FDIC or NCUA insured? The answer is yes. Money market accounts are insured by a bank or credit union. However, money market funds are not. Money market funds are an individual product entirely separate from a money market account, but the similar name and the fact that some people use the terms interchangeably can cause confusion.
Money market funds, not FDIC or NCUA insured, are used by traders and investors to earn interest on their financial portfolios.
Pros and Cons of a Money Market Account
Advantages
- You’ll likely have a higher APY than a savings account. An annual percentage yield or APY is the amount of interest you earn on a savings product.
- Able to use a debit card, write checks, pay vendors online, etc.
- Depending on your financial institute, a money market account may increase the APY as you reach minimum balances.
- Flexible options for converting or closing the account.
- Depending on the institution, having a money market account may also grant you access to a licensed financial advisor who can help you invest your money.
Disadvantages
- Limits certain types of withdrawals to 6 per month: It should be noted that traditional savings accounts have this same restriction.
- Higher minimum balance requirements than traditional savings: However, it depends on the individual bank or credit union.
- Variable rate: A variable rate means that the APY changes based on inflation and the economy. This means that a money market can potentially yield less than traditional savings. While this doesn’t happen often, it’s possible. As such, review your APY every statement cycle to ensure you’re making the most of your money.
- Fees: Money market account fees vary from bank to bank, so it’s best to research the fees you can most easily avoid. If your primary bank or credit union doesn’t offer a money market, open one at another financial institution.
Savings Account vs. Money Market Account: What’s the Difference?
Money markets, on average, have a higher yield than a traditional savings account. Plus, they offer more accessible payment options and, depending on the bank, may grant you access to reduced fees on other accounts and other perks.
That said, savings accounts offer a fixed interest rate, so you’ll have consistent yields. Plus, banks and credit unions offer higher-level savings accounts that can potentially earn almost as much as a money market in the short term. In the long run, the best money market always beats the best savings account regarding interest yields.
Who should have a money market account? Include a small portion on “how to get started if you think it is right for you.”
Curious if a money market is right for you? It depends on your long-term savings goal. If you can maintain a high balance or are saving towards tuition, a car, and other expensive things, then a money market is your best option. Although it has restrictions, it also helps keep your money accessible in case you find yourself in an emergency.
Truthfully, anyone with significant savings should have a money market or other high-yield account. If you don’t yet have enough money for the opening deposit, make that your new savings goal. The average money market minimum is $1000; remember that the minimum isn’t a fee. The bank won’t take it. That means that although you can’t access it, the money is still yours.
Another good reason to open a money market is to take the first step in investing. While a money market isn’t the same as an escrow account, it can help get you started. Or, at the least, it’ll give you a place to park your money while you consider investing.
You can open a money market online or in person if you have the minimum opening deposit. If you don’t currently have a bank or credit union, then all you’ll need is your ID and about 30-45 minutes to join one. Remember to shop around to find a money market that fits your savings goals, as every financial institution offers slightly different benefits.
Bottom Line
In the end, a money market account is a great financial resource for savings and can be the first step in building an investment portfolio. Remember to monitor your statements and to go through the terms and conditions to best understand how to maximize your deposits. Check out our articles on investing basics for college students and bonds for more information on investment products.
