How Do Money Market Accounts Work?
Has your friend been talking about the great returns he’s getting on his money market account—but you’re too embarrassed to ask him what that means? No worries, we’ve got you covered!
In this blog, we’ll explain what a money market account is, how money market accounts work, and how they compare to other savings accounts so that you can choose the best one for you.
What is a Money Market Account?
Let’s start with the basics: what is a money market account? A money market account (or MMA) is a unique hybrid of a savings and checking account offered by banks and credit unions. MMAs earn more interest than regular savings accounts while also allowing more withdrawals.
The Role that Interest Plays in MMAs
When you invest in any savings account, you’re agreeing to let the bank or credit union loan your money to other customers/members. In exchange for letting them borrow your money, the institution pays you a fee, called interest.
The amount of extra money you’ll receive is based on an interest rate called an annual percentage yield (APY) which can fluctuate based on market conditions and other factors. For example, the Federal Reserve might change the federal funds rate up or down, prompting your financial institution to change its rate accordingly.
Since regular savings accounts are considered pretty low risk, you’ll earn some reliable interest, but not at a very high rate. Money market accounts are a little riskier than regular savings accounts and come with a few more restrictions. Therefore, they’ll earn more interest.
The Nuts and Bolts of MMAs
While there can be slight variations, there are some common, fundamental features of all MMAs:
Minimum Balance Requirement: You must maintain a minimum daily balance determined by the financial institution; if your balance dips under that number, you’ll be charged a fee.
Deposits: You can make unlimited deposits ($50 minimum) to your MMA.
Access to Funds: With a money market account, you have convenient access to your funds, with up to three withdrawals or transfers allowed each month. This helps you keep your money working for you while maintaining control over when and how you access it.
Federal Guarantee: MMAs are federally insured up to $250,000 per account by the FDIC (for banks) or the NCUA (for credit unions), providing an insurance safety net for your hard-earned money.
What Features Come with a Money Market Account?
When it comes to features, MMAs offer the best of both the checking and savings account 'worlds'. They provide more interest than savings accounts but come equipped with checks and a debit card so you can spend your money hassle-free without having to transfer money between accounts first.
Essentially, MMAs offer increased flexibility because you can earn more interest than a savings account but have the ability to withdraw your money more easily through check writing, debit card usage, and even digital banking—which allows you to make transactions without having to visit a branch.
Just remember that in order to earn the higher interest associated with MMAs, you’ll have to maintain a minimum balance requirement which is determined by the institution but is typically at least $2,500.
Money Markets vs. Other Savings Options
Of course, money market accounts aren’t the only interest-bearing savings options out there. Regular savings and share certificate accounts are other popular choices. Regular savings accounts typically offer lower interest amounts but there usually isn’t a minimum balance requirement or monthly fees.
Share certificates, on the other hand, are accounts where you agree not to touch your money for a period of 3 to 60 months, depending on which certificate you choose. In exchange, the financial institution gives you an interest rate that’s higher than regular savings, but they also have minimum balance requirements of $500 to $1,000.
While share certificates and money market accounts have similarities, there are key differences to be aware of before deciding on one or the other.
How to Choose the Best Money Market Account for You
Money market accounts come in a few shapes and sizes, so choosing the right one for you depends on your current financial circumstances. All MMAs require a minimum balance that’s in the thousands of dollars and if you dip below that number, you’ll be charged a fee. So, evaluate your finances and make sure you won’t need to tap into the money before the term ends.
Also when choosing an MMA, look for the best interest rate you can get because, of course, this will help you grow your money faster. A tiered rate structure means that the more money you invest, the more interest you’ll earn, and the faster your account will grow.
Ask about early withdrawal fees and monthly maintenance fees, which can chip away at your savings. At Oxford Federal Credit Union, we don’t charge these fees for our money market accounts.
Typically, you can make up to 3 withdrawals per month without incurring a penalty. Consider how frequently you'll need access to your funds and choose a money market account that suits your needs.
Open an MMA With Oxford Federal Credit Union
Now that you know how a money market account works, you can feel confident about opening one with Oxford Federal Credit Union. Click the button below to get started!