12/16/2022
Knowing the different banking instruments available can be important for those who want to better manage their personal finances.
Not unlike savings accounts, money market accounts are attractive products that can give you a little more versatility. That's why we're interested in unveiling their secrets to you.
Origins of money market accounts
In the early 1980s, the federal government imposed a limit on the amount of interest that credit unions and banks could offer on their savings accounts.
This measure made it impossible for institutions to compete with the dividends offered by money market mutual funds.
Money market account with a higher profitability than savings accounts, with total availability of your money through checks and transfers.
Savings account that offers a minimum return on your money.
Saving account without commissions and with debit card and free checks, without fees or expenses of any kind. There is no minimum balance required and it is remunerated from the first dollar.
Money market account, halfway between a checking and a savings account, and with high profitability. With the possibility of using cards and checks and with an interest-bearing balance.
Under pressure from the banking industry, in 1982 Congress was forced to enact the Garn-St. Germain Depository Institutions Act.
This statute allowed financial institutions to promote and offer money market accounts, which paid a market-equivalent interest rate that was much more attractive to potential customers.
What are money market accounts?
They are basically savings instruments offered by banks, savings institutions, credit unions and neobanks. They are also known as money market deposit accounts (MMDA), but should not be confused with money market mutual funds.
They offer higher interest and other services that deposit instruments and regular savings accounts do not.
Depending on the bank, you can find money market accounts that include a debit card and check writing options.
In addition, they only allow you to make 6 withdrawals or transfers per month, may have a minimum balance to give you the highest rate, and have certain restrictions that make them less versatile than checking accounts.
They are often compared to high-yield savings accounts because the only difference is the name.
They have become very popular deposit products and personal finance specialists recommend them to accumulate funds you may need in the short term or to start building equity.
Characteristics of MMA
The key features of money market accounts can be summarized as follows:
- They can include low maintenance fees.
- They offer relatively high interest rates in excess of 2%.
- They usually require a minimum balance ranging from $2,500 to more than $10,000.
- It is possible to open a money market account from as little as $1.
- Funds up to $250,000 ($500,000 for joint accounts) are FDIC insured and you can have as many as you want in the same institution.
Advantages and disadvantages of money market accounts
Although we have already outlined some of the most relevant benefits of money market accounts, it is good to delve into the pros and cons of these banking products. Of their advantages, we can highlight:
- MMAs are safe instruments because they are protected by the FDIC or the NCUSIF (credit unions).
- You get better interest rates than with other savings accounts because the financial institution invests your money in low-risk investments.
- You can withdraw your funds whenever you want.
- In some cases, they give you the possibility of writing checks or include a debit card, giving you more flexibility.
Among the less favorable aspects of money market accounts, it is worth mentioning:
- Although you have access to your money, there is a limit of 3-6 transactions per month to pay by check or debit card.
- Be on the lookout for introductory interest rates. Many banks promote very good rates that may last a few months or less.
- These financial products are designed to give you the freedom to move your money around and save a little more in the short term. If you want to invest for the future, a CD ladder scheme might be more profitable.
Comparison of mutual funds and money market accounts
Unlike MMAs, money market mutual funds are products offered by brokerage firms and mutual fund companies.
For this reason, they are not FDIC or NCUA insured. However, they are considered low risk because the money is invested in CDs and very short-term private and public debt.
In terms of access to money, money market accounts and MMMFs work the same way. The difference is that the former have a trading limit and the latter do not.
On the other hand, mutual funds tend to generate more dividends, but may have restrictions on the maximum amount for a check or stock redemption.
Español: Qué son las cuentas de mercado monetario