Need a location to save your money? The best option might be MMA.
You can keep some money in a money market account (MMA) and receive somewhat higher interest.
Consider a money market account as one of many cousins in the family of savings accounts, which also includes certificates of deposit, high-yield savings accounts, and straightforward savings accounts that you frequently open along with your checking account.
There are times in this family when a money market account is valued highly among the relatives. Other times, it would be wiser to entrust one of the other cousins with your finances.
Learn the fundamentals of money market accounts first.
A money market account is what?
These interest-bearing accounts are offered by banks and credit unions. Common features of money market accounts include a debit card, restricted check-writing rights, and six free withdrawals per month.
A minimum deposit and balance are frequently necessary for MMAs, and these amounts can range from $0 to hundreds of thousands of dollars. Some accounts provide higher interest rates as a reward for larger balances.
Keep in mind that money market savings accounts are distinct from the investing firms' similarly titled money market funds. You cannot lose any money with money market savings accounts since your funds are protected by the federal government, unlike with money market investing funds.
You can utilize money market savings accounts to help fight inflation because they often offer greater rates than conventional savings accounts.
If, for instance, the annual rate of inflation was 5% and you had $10,000 in savings stashed away beneath your mattress, after a year you would have lost 5% of your purchasing power. However, because you would be earning interest on that $10,000, you would be able to keep more of your purchasing power.
There's a catch, though.
When inflation is strong, banks typically provide higher interest rates, although this isn't always the case. Money market accounts start to lose some of their appeal if inflation increases faster than interest rates.
For instance, even if inflation was measured by the consumer price index, which increased by 7% in 2021, the typical money market account only earned 0.09% interest in banks and 0.13% in credit unions. Therefore, owners of MMA nonetheless experienced a loss of nearly 6% in purchasing power on the money in those accounts last year.
When inflation was 1.9% in 2018 and the highest-paying MMA offered 2.01%, contrast those figures. The value of your savings would have remained essentially unchanged had you left your money in that MMA during this time.
Savings versus certificates of deposit versus money market accounts
Savings accounts and certificates of deposit are two relatives of money market accounts. You can choose which is best for you by understanding how the three compare.
When MMAs and savings accounts are compared, both offer you simple access to your money, typically with six free withdrawals or transfers each month.
Because the minimum balance requirements for savings accounts are sometimes low or nonexistent, maintenance costs are less of a concern. However, this extra flexibility comes with lower interest rates and no check-writing capabilities.
However, internet banks provide high-yield savings accounts with interest rates that are comparable to and occasionally higher than those of money market accounts. This is particularly true when overall interest rates are low and the spread between savings and money market rates isn't very wide to begin with.
CDs force you to lock up your money for a period of months or years, unlike money market and savings accounts. The greater rates you get depend on how long you lock it up. The drawback is that if you need to withdraw your money early, the bank will charge you.
With CDs, your money must be locked up for a certain amount of time, usually months or years, unlike money market and savings accounts. Better rates are available the longer you lock it up. The drawback is that the bank will charge you fees if you need to withdraw your money early.
The best money market accounts to look for
Online banks typically provide lower minimums and better interest rates on money market accounts than more conventional banks.
For instance, as of April 2022, online bank Vio Bank offered an MMA with a 0.66% annual percentage yield (APY), a $100 minimum opening deposit, and no monthly maintenance cost.
Access to your funds will be somewhat constrained as a result. Online banks lack physical branches and ATM networks. Online money market accounts can be a terrific offer if you're okay with it. Money in an online bank can be accessed by transferring it to a regular bank account.
When the market is favorable, you might find the ideal balance of convenience and respectable money market account returns at a smaller bank or credit union in your neighborhood.
Do money market accounts make sense?
If you meet the following three requirements, a money market account can be your best choice:
- Your main aim is to save money.
- Your money shouldn't be locked up in a CD.
- You aim to outperform the interest rates offered by conventional savings accounts.
However, to see if you can get a better deal, you can wish to compare rates with high-yield savings accounts.
Avoid choices that may charge you recurring monthly fees if you decide to open a money market account. These costs will simply reduce your returns, which are what initially drew you to this kind of account.
Having said that, if inflation significantly outpaces the available interest rates, you might get a better return on your money by diversifying your investment portfolio.
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