Money Market Account

Financial Dictionary -> Banking -> Money Market Account

A money market account is a type of savings account offered by financial institutions such as credit unions and banks, usually coming with a higher interest, higher minimum balance, and limited withdrawals per month (about 3 to 6). Unlike regular savings accounts, the money market account functions as a checking account, allowing holders to write up to three checks or so per month.

The amounts deposited into a money market account are protected by the FDIC or Federal Deposit Insurance Corporation. Even if the financial institution goes bankrupt, the money can still be withdrawn as the FDIC guarantees the deposit. The latter is a secure deposit insurance corporation; so, no clients have lost money entrusted to banks and other financial institutions insured under it. The National Credit Union Administration is another agency that insures money market accounts in credit unions.

How Money Market Accounts Earn Interest

Credit unions and banks allow account holders to withdraw cash from money market accounts at any time during the month. However, a limited number of withdrawals is permitted. Like the regular savings account, this particular type earns interest. The only difference is that it earns more due to the higher interest rate.

Banks and other financial institutions pay interest to account holders, allowing them to use their savings to make more money. That is how banks basically work - they sell money in the form of loans and other financial instruments to the customers. In return, creditors get interest on the money they lend to borrowers. The interest accumulated on the granted loans is used to pay for the interest earned by money market accounts. In addition, financial institutions may offer higher interest rates to account holders who have more money in their accounts.

With this type of accounts, investment strategies are quite similar to those used for a money market fund. In the United States, this financial instrument is not considered a transaction account, and only 6 transactions to third parties are permitted within a given month. If customers exceed their limit, the bank may actually close their accounts. ATM transactions may also count as withdrawal. In addition, money market accounts are subject to Regulation Q, forbidding the payment of interest on checking accounts.

Maintaining Money Market Account

Because account withdrawals are limited to a certain number per month and the balance to maintain is quite high, you have to be careful when opting for withdrawal. If the cash on the account is not maintained at a certain minimum, the bank will charge you a fee. The same happens if the withdrawals per month exceed the number permitted. Typically, the fees are about $5 to $10.

Shopping Around for the Best Offers

Due to the limitations that come with money market accounts, it is best to check out for good deals before opening one. Some of the issues to keep in mind when you compare offers include account service charges and fees, interest rates to be paid on the balance, and minimum balance required.

After the opening of your account, the financial institution will send you a mail or email, showing your account statement. Make sure you check if all details in the statement correspond to your banking transactions. After making a deposit into your account, sit back, relax and watch your money grow.