A quick guide to money markets

Money market accounts are a popular type of investment vehicle because they combine two important things: good interest rates and high liquidity.  With a money market account, you can tuck money away to grow for a large purchase, as a rainy-day fund, a down payment on a home, or any other reason.  With many banks, your money market account may be “linked” to other types of accounts, like certificates of deposit or a basic savings account, giving you the ability to easily transfer money when needed.  And sometimes your account will be linked with a debit card, giving you access to your money via an ATM as well as through a computer or a bricks-and-mortar branch office.

While money market accounts do allow access to funds, and many institutions provide checks for that purpose, a money market accounts should not be considered as a checking account.  Withdrawals are limited by law to six per month, and anything in excess generally incurs a substantial fee.  Also, minimum balances tend to be higher with money market accounts than with traditional checking accounts.  Some banks charge a fee if your money market balance drops below a certain amount at any time during the month, or if your average balance drops below a stated amount.

Money market accounts often give the depositor access to other banking products and services, such as wire transfers, stop payment orders, cashier’s checks, debit cards and foreign currency or check conversion.  In the United States, money market accounts are insured by the Federal Deposit Insurance Corporation, or FDIC, giving extra protection to your funds.  Money market accounts are highly competitive between banking institutions, so consumers who spend some time comparing the Annual Percentage Yields (APYs) between banks, can often find an account that fits their needs and pays a higher rate of return.  For customers who are comfortable with online banks, these can often pay at least as well as a bricks-and-mortar bank in your town, though of course there will be no building or tellers.

Before deciding on a money market account, look at any rules and restrictions associated with the account.  What fees might be assessed?  What is the minimum opening balance?  Is there a minimum balance requirement, or average balance requirement, throughout the month?  What happens if you don’t meet that?  Is there a fee for writing a check?  If you prefer a paper statement, is there a fee for that?

Because interest rates are low right now, find out if the interest rate on the account is variable.  Try to choose an account with a variable rate so that when rates rise, your interest rate will go up with it.  Check to see how often the rate may be changed, and also to what instrument the rate is tied, like the 30-year Treasury bond rate or other ‘floating’ indicators.  The more often your rate can change, the better off you are when rates are rising.  Just remember that one unexpected fee, such as an overdraft fee, can eliminate some interest payments, so examine the fee chart closely.

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