Financial institutions offer a variety of savings products with varying yields and liquidity. Traditional savings accounts, also called passbook accounts, offer complete fund availability and low minimum balances, but also very low interest rates. A Certificate of Deposit (CD), which pays a much higher return, is an option for someone who does not need access to his money in the near future. Another savings product offered by banks and credit unions is the money market savings account. These accounts have a higher minimum balance requirement and more limits on monthly withdrawals than a passbook account, but they also pay a higher interest rate.
A money market savings account is similar to a money market fund in that they both invest in short-term, fixed-income financial products. A short-term investment is one that matures in less than one year. The differences between the two accounts, however, are significant. The money market funds are invented in short-term securities which are considered low-risk, but these are not always as secure as the products purchased by the savings accounts. Also, there is no guaranteed rate of return, and money market funds are not insured by any governmental agency.
Money market funds were first developed in the United States, which is still the largest market. These investments are growing in popularity across Europe, though CDs are still preferred over a money market fund. One of the reasons for this may be the lack of uniform regulations; every country has its own requirements for money market instruments. Money market savings accounts are primarily a US banking innovation.
By investing in a money market savings account, someone receives a higher interest rate than with a traditional account. In exchange, he is required to maintain a larger minimum balance and is limited to six withdrawals or transfers each month. Of these, only three can be made with a check. A violation of either of these requirements usually results in a fee being assessed against the account. There is no limit, however, on the number of deposits which can be made.
Because of the limits on withdrawals, a money market savings account should not be used in place of a standard checking account. These accounts are intended for funds that are not needed immediately, but need to be accessible in an emergency or for future projects. Unlike a CD, this kind of savings account has no time limit, and therefore has no early withdrawal penalties.
One of the big advantages of a money market savings account is that the funds are insured by a governmental agency. In the US, banks deposits are insured by the Federal Deposit Insurance Corporation (FDIC), a federally sponsored corporation. Credit Unions deposits are insured under another government agency, the National Credit Union Administration (NCUA).
When making a decision about what kind of savings accounts to use, a person needs to consider several factors. He should first determine if he has enough liquid funds available for monthly living expenses before putting money into an account with withdrawal restrictions. He should also consider dividing his extra money between a money market savings account and a product, such as a CD, with higher returns. It also pays to shop around for the best rates available and compare terms prior opening an account.