A money market account is a type of savings account that banks and financial institutions offer to investors. The institution often invests money from these accounts into securities, resulting in potentially higher financial returns. Benefits of these accounts include higher interest rates, low risk, government insurance, and allowed withdrawals. In some cases, different types of money market accounts are offered through the financial institution. These may have higher risk or deposit limits that an individual must maintain to avoid fees or penalties.
Most banks offer standard savings accounts, which may earn individuals and businesses small interest rates, such as one to two percent annually. These are safe, secure, liquid investments that reward an individual for not spending money. A money market account is very similar, although interest rates are higher than standard savings accounts. In general, a money market account can typically pay between three and four percent interest during good economic times, although this can vary widely. Financial institutions may use the interest rate set by the government or federal reserve bank as the rate for these accounts.
Another similarity between savings and money market accounts is their relatively low risk. Compared to stocks and bonds, accounts held through banks and financial institutions are often low risk. The cash investments made by individuals and businesses may have certain withdrawal requirements — such as waiting six months to close or withdraw large dollar amounts — but the investment is highly liquid. Investors can spread funds among different institutions in order to take advantage of different interest rates and terms offered by financial institutions. Starting these accounts usually requires filling out a few forms and depositing a minimum balance.
Banks, credit unions, and similar financial institutions are often the main sources for money market accounts. These institutions typically have government insurance, where customer deposits have potential reimbursement in case of bank failure. This is a significant benefit as investments in stocks or bonds are typically unrecoverable during a company’s bankruptcy. Large investments in a money market account may exceed the government reimbursement amount. For example, amounts invested over $100,000 US Dollars (USD) in one institution may only have the first $100,000 USD reimbursed by the government.
Withdrawals are also possible when using a money market account. While the frequency and dollar limit may have restrictions, individuals can still remove funds when needed. This allows for immediate use of earned funds. Investors who begin to have money troubles can also cash out the account, although this may carry penalties and fees. Financial institutions usually disclose withdrawal terms upon starting the account with investors.
