As we head into the end of the year, many people are looking for ways to build up their savings. Whether it’s for the holidays, vacations, or a down payment on a house or car, one way to achieve savings goals is through investments like a money market account.
Investing can be intimidating though, and with so many options, it may be hard to know what is best for you. Moreover, the complexities of the financial markets can make investing seem scary enough to leave you pilfering your piggy bank instead.
Don’t smash that piggy just yet though. If you’ve been looking for new ways to save for short-term goals, you may want to consider a money market account. But what exactly are they and are they right for your goals? Let’s dive in.
What is a money market account? A savings account alternative
A money market account (MMA) is a savings account that often includes check-writing and debit card privileges, similar to a checking account at a credit union. This may be helpful in an emergency, as you may access funds more easily than with traditional savings accounts. Additionally, most MMAs pay a higher interest rate than regular or high-yield savings accounts, earning you more money the longer it collects interest.
An initial deposit is required to open an MMA, and balances must meet a minimum balance requirement while they are active. A service charge is incurred if the balance falls below that minimum amount. You earn dividends by maintaining your daily balance, and these dividends may be affected by variable interest rates and are compounded monthly. If needed, you can make withdrawals, transfer funds, or write checks from this account up to six times in a month.
In terms of risk, MMAs are a secure way to save money, with deposits insured by the National Credit Union Administration (NCUA) at credit unions and the Federal Deposit Insurance Company (FDIC) at banks. That means your money is protected even if the issuing institution collapses.
When should I open a money market account?
MMAs are best for people who are looking to earn more interest than they would with a regular savings account, particularly with short-term savings goals in mind. For example, if you’re looking to save money for a specific purchase, like a vacation or a down payment, an MMA may be a good option. MMAs aren’t intended for long-term financial planning, like retirement.
Let’s say you’re planning for your bucket-list vacation. You know the trip is a couple years away in terms of planning and saving, and you have a significant savings goal. You may consider using an MMA because the higher interest rate will make your money work harder. Plus, you’ll easily be able to access the funds, like with a debit card, to purchase your flights, lodging, or experiences in advance. Change of plans? No worries! MMAs aren’t specifically tied to a savings goal, like a vacation fund, so you can handle any unexpected changes life throws your way.
What are the advantages and disadvantages of a money market account?
Now that you understand what an MMA is and how it works, let’s cover the pros and cons of MMAs. One of the biggest advantages money market accounts offer are the higher interest rates, which allows your money to work harder. Additionally, MMAs are ideal for an emergency fund since you can access your funds more easily than with a CD when needed, either through check-writing privileges or a debit card. Lastly, MMAs are a safe place for you to store cash while working towards a short-term savings goal because they have federal insurance protection.
Some downsides of MMAs include limited transactions, fees, withdrawal restrictions, and minimum balance requirements. Some institutions require a high minimum balance to open an MMA and may impose fees if that balance is not maintained.
What are the alternatives to a money market account?
If a money market account doesn’t seem like your perfect match, there are other options. Alternatives to an MMA include a savings account or certificate of deposit (CD). Like an MMA, a savings account or CD allows you to save towards a goal. CDs, however, require only one deposit that stays in the account until its maturity date. Because you give up access to your funds, they generally offer a higher rate of return versus traditional savings accounts or MMAs.
Savings Account Comparison |
||
|---|---|---|
| Money Market Account | CD | Traditional Savings Account |
| Higher interest rates | Higher interest rates | Low minimum balance |
| Access to funds with checks or debit card | No access to funds until maturity | Access to funds with checks or debit card |
| Can withdraw, transfer funds, or write checks up to six times in a month | Minimum deposit requirement | Can withdraw or transfer funds up to six times in a month |
| Minimum balance requirement | No monthly maintenance fee | Insured by the NCUA or FDIC |
| Dividends compound monthly | Insured by the NCUA or FDIC | Good for general savings |
| Insured by the NCUA or FDIC | Good for short-term goals | |
| Good for short-term goals | ||
Is a money market account the same as a money market fund?
It’s important to note that a money market account isn’t the same thing as a money market fund. Money market funds are financial products tied to government securities and other investments that could lose value if the market falls, while an MMA is independent of the market. Unlike MMAs, money market funds are not federally insured by the NCUA or FDIC.
If you’re considering an investment, speak with your financial advisor to determine which options will meet your individual needs—in the short and long term. You can schedule a meeting at no cost and no obligation with a financial advisor at Georgia’s Own to discuss your investment plans.
Final takeaways:
- MMAs are high-interest-earning accounts that give account holders the benefits and features of both savings and checking accounts, including check-writing and debit card privileges.
- MMAs are best for achieving short-term financial goals as opposed to long-term financial planning.
- Alternatives to MMAs include certificates of deposit (CDs) or savings accounts.
With your money working harder than in a traditional savings or checking account, and with easy access to your funds, a money market account can be incredibly helpful to reach short-term savings goals or help cover expenses in an emergency. Do you have a short-term savings goal that may benefit from a MMA? Share your goal in the comments!
