4 steps for using money market accounts to build savings

April 20, 2011

| MoneyRates.com Senior Financial Analyst, CFA

You may already know that money market accounts are a useful place to put some of your savings, but have you thought about how to use money market accounts to help build those savings in the first place?

Money market accounts are ideal for the job, especially if you take a step-by-step approach to building savings.

Why money market accounts are perfect for building savings

Money market accounts are well suited for helping you build up savings. Their key limitation is that they restrict the number of withdrawals you can make in any given month, but when it comes to building savings, that limitation is actually a good thing--you want to keep the money there.

Meanwhile, money market accounts offer higher interest rates than savings accounts on average, according to the FDIC. In particular, money market accounts offer a higher premium for jumbo deposits than savings accounts or CDs, so as your savings build, you'll find money market accounts especially rewarding.

4 steps for building savings with money market accounts

Here's how you can use money market accounts to build your savings step-by-step:

  1. Choose the right money market account. It's true that money market accounts are a good savings vehicle, but not all money market accounts are the same. Shopping for the best money market rates upfront can help your savings build more rapidly in the months and years ahead. Here's a key tip though: when shopping for the best money market rates, focus on accounts that have consistently offered high rates, rather than those which are using high rates as a short-term marketing ploy.
  2. Direct deposit your pay into your money market account. People generally have their wages deposited into their checking accounts, and then distribute money from there to pay bills, buy things, and contribute to savings - if there's anything left over. Put your savings first by having your pay deposited directly into your money market account. Sure, you can't use your money market account for all your other transactions, but you don't need to. You just need to make one budgeted transfer a month into your checking account to fund your day-to-day expenses. This will help prevent those expenses from starting to crowd out savings.
  3. Set a goal for "filling" your money market account. Money market accounts are great for building savings, but they should not be the only part of a long-term savings program. You should have a goal in mind for how much you want to build up your money market account, and a timetable for when you plan to meet that goal. The amount should be enough to cover potential emergencies, and provide a stable foundation for your long-term savings. Setting a goal and a timeframe for accomplishing this will help you keep yourself accountable.
  4. Use your money market account as a jumping off point for longer-term investments. Long-term investments aren't always well suited to incremental investments, so use your money market account to build up a critical mass of savings, and then from there you can make targeted investments in longer-term savings vehicles.

In short, thinking of money market accounts simply as a place to put your savings might delay the day when you start to accumulate those savings in the first place. Opening a money market account can be the first step towards building up your savings rate.

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