How do money market accounts work? Let’s consider this question in more detail

You’ve heard of them: Money Market Accounts. But what are they? A money market account is a type of savings account that’s offered by banks and credit unions

Now for the second question: How do money market accounts work? They operate much like a savings account, but they pay higher interest and have higher minimum balance requirements. But money market accounts are also similar to checking accounts, as most of them allow up to three checks per month. Now let’s explore these special accounts in more detail.

Are Money Market Accounts Safe?

We understand that you want to keep your funds safe; regardless of the type of account that you use. So let’s consider this pressing query:

For bank accounts, the funds in a money market account are insured by the Federal Deposit Insurance Corporation (FDIC). Therefore, if your bank goes out of business, your money is safe. 

For credit unions, the funds in such accounts are insured by the National Credit Union Administration (NCUA), which is a federal agency. That means if your credit union should fold, your money market account balance is safe and secure!

How Do Money Market Funds Differ From Bank Accounts?

Let’s discuss how money market funds differ from bank accounts

The money market account is the happy medium between regular savings versus checking accounts. Savings accounts are used to store funds while checking accounts help us to conduct daily transactions via debit cards and checks. A money market account contains the best elements from both account types. 

A money market account is a type of savings account offered by banks and credit unions. This interest-bearing account is referred to as money market deposit accounts (MMDA), it has some features that are not found in other accounts. 

The money market account comes with restrictions that make them less flexible than a regular checking account. However, although they often pay a higher interest rate and have higher minimum balance requirements (sometimes $1000 to $2500), they may only allow three to six withdrawals each month. Another difference is that many money market accounts will allow you to write up to three checks per month. 

The other advantage of a money market account is they often offer insurance protection and also debit card privileges. Another con is that not only are there limits on these account balances, but there may be monthly fees if the account balance falls below the minimum level or has excessive withdrawals. 

Interest on a Money Market Account

When you place your money in a money market account it earns interest at a higher rate than a regular savings account. This interest is the money that the financial institution pays you so that they can use your money to fund loans to other persons. Specifically, it works as the following:

  • You open a money market account at your local credit union
  • Your credit union pays you interest on the money that you deposit and keep in that account.
  • Your credit union then loans that money to other people. However, they charge an interest rate that is slightly higher than the one they pay on your account. 

The difference in these interest rates is how your credit union covers the costs of its operations and remains in business. The interest rate on money market accounts is usually compounded each day and paid each month. The best thing is that compound interest means that the bank is paying you interest on your original deposits and the previous interest payments. 

However, the interest payments to money market accounts in different financial institutions vary across each one. This is often a function of competition as each financial institution tries to get people to open an account with them by offering more attractive interest rates. 

Furthermore, with money market accounts, the more money you have in an account, the higher the interest rate you will receive. However, you should always check with your local credit union about the interest rate changes. 

Managing Your Money Market Account

Effective management of your money market account and other investments will yield significant financial gains

 

Money market accounts allow you to withdraw your funds as needed. However, you are usually restricted as you can only make a limited number of withdrawals each month. Going over that threshold may also result in fees. Also, you are subject to fees if your balance falls below the minimum level. This means that you should shop around and compare what different banks are offering and consider:

  • Fees and service charges on the account. 
  • Minimum balance requirements.
  • The interest rate paid on your balance. 

Upon opening your money market account, your beginning balance is recorded as well as all of your deposits and withdrawals. Furthermore, your credit union will send you a monthly statement of your account balance either via mail (or email if you prefer). The statement will show a list of your transactions as well as any fees charged to your account and the interest earned. We recommend that you always scrutinize these statements to keep abreast of the details of your account. 

However, you need to remember to make regular deposits to your money market account. Then you will see your money growing even faster by the power of compounding interest.

Choose Riegelwood FCU for a Brighter Financial Future

How do money market accounts work? You should now be clear about this special type of account and its role in your financial wellbeing. Let Riegelwood Federal Credit Union help you plan for the future. Contact us today to discuss how we can partner with you to achieve your financial goals.