Do you need a down payment for your car? Or are you looking for a way to fund a home renovation project? Money market accounts allow you to earn cash through high-interest rates while allowing you limited transactions in case you need to spend some of your money for other things. Keep reading to see if having a money market account can help you achieve your financial goals.
What is a Money Market Account
The money market account is a hybrid of a savings and a checking account. While it's classified as a savings account, it has a higher variable interest rate than a standard one.
Money market accounts offered by credit unions are protected by NCUA (National Credit Union Administration), and those from banks are insured by the FDIC (Federal Deposit Insurance Corporation).
Money Market Account vs. Savings vs. Checkings
Money market accounts have higher annual percentage yields (APYs) than savings and checking accounts. This is because financial institutions use the money in savings and sometimes checking accounts to fund loans and credit cards for members.
Meanwhile, the funds of money market accounts are used for low-risk, short-term, and highly liquid assets.
Due to their higher interest rate, money market accounts also require a high minimum deposit and balance to fulfill their investment purposes. Credit unions and banks may limit the number of monthly transactions to help maintain account balances. These transactions can include check-writing, debit card purchases, and electronic transfers.
Like other banking accounts, each institution's money market account is covered by the NCUA or FDIC up to $250,000.
* based on $10,000 and $100,00 product tiers
** based on $2,500 product tier
How Money Market Account Increases Your Funds
Credit unions and banks use deposits in money market accounts to invest in short-term liquid assets such as certificates of deposits (CDs), municipal bonds, or treasury bills (T-bills). The interest earned from these assets is then divided back into the account holders.
You can withdraw or write a check against your account balance. However, you may be subject to minimum balance requirements and service fees if the balance isn't maintained.
Before, money market accounts were limited to six monthly withdrawals and transfers. However, in April 2020, the Federal Reserve made a significant change by lifting this restriction under Regulation D. It's essential to note that while this is a federal regulation, individual banks and credit unions may still enforce their own limitations and restrictions on money market account withdrawals. Therefore, checking with your financial institution about the specific limits that apply to your account is always advisable.
Money Market Accounts Pros and Cons
Money market accounts have advantages and disadvantages, especially compared to other accounts.
While money market accounts have higher interest rates than other standard savings accounts, their interest rates are variable. The interest rate can rise or fall anytime, depending on the Federal Reserve.
Money market accounts allow for liquid savings. However, most credit unions and banks limit the transactions or charge a fee when the account balance goes below the minimum.
When and When Not to Have a Money Market Account
Money market accounts are best for short-term saving goals rather than long-term investments. They can be used for wedding funds, taxes, car down payments, travel expenses, and home renovations. However, for long-term investments such as retirements, it is best to consider other options.
Sometimes, a money market account may not fit your preferences or lifestyle. Maybe you don't need to write checks, so perhaps a high-yield savings account is for you. Sometimes, you need a bank account to deposit your salary. Then, we'd recommend a checking account for multiple transactions.
The interest rate of money market accounts can also fluctuate because of the Federal Reserve. For fixed rates with high yields, we recommend CDs, especially if you have money you don't have to use for three months to ten years.
Opening a Money Market Account with Canopy Credit Union
A money market account presents a wonderful opportunity for short-term savings goals. Its high-interest rate allows you to accumulate cash within months. At the same time, it still allows you access to your money when you need to use some of it.
Here at Canopy Credit Union, we offer money market accounts with increasing tiered rates. This means the more money you have, the higher our competitive rates. While most Money Market Accounts offer debit cards and check-writing, Canopy's accounts are designed differently to help you meet your financial goals. See our money market account page to learn more.
FAQs
Are Money Market Accounts FDIC-Insured?
The FDIC insures money market accounts held by banks, and the NCUA protects and insures money market accounts held by credit unions.
Are Money Market Accounts Liquid?
Money market accounts are readily accessible for cash withdrawals. However, like most savings accounts, they have withdrawal limits and minimum balance requirements to maintain a large and stable deposit.
Can Money Market Accounts Lose Money?
Money market accounts have the highest fees to maintain, and you can also lose money through penalties and frequent transactions. Frequent transactions lower your balance and penalize your account, furthering your losses. A lowered balance can produce a lowered interest, which may not be able to cover the account's maintenance fees.
You will not lose money in your money market account with proper balance maintenance and mindfulness of the withdrawal limit.
However, what if your bank or credit union fails? Fortunately, you will not lose money in your money market account in this manner. The FDIC or the NCUA protects your money market account.
What is the Downside of a Money Market Account?
The downside of a money market account is its higher initial deposit and balance requirements than the traditional savings account. It also has variable rates that can go up or down anytime. Furthermore, they are not meant for everyday banking as they can have a limit on withdrawals and transfers.
Is a Money Market Account Better than a Savings Account?
A Money Market Account is best for people who can afford its higher initial deposit and balance requirements. It is also best for people who have short-term savings goals. We recommend other savings accounts for those who can afford lower initial deposit and balance requirements. Different types of savings accounts and investments are also preferable for people who can wait to liquidate their funds.