Use a Money Market Account Correctly to Minimize Fees
July 06, 2009
| MoneyRates.com Senior Financial Analyst, CFA
Money market accounts can be the perfect hybrid between checking and savings accounts, offering some of the flexibility of checking accounts and some of the yield of savings accounts. Used incorrectly though, fees on these accounts can quickly eat up most or all of that interest yield. Some illustrations will show you how this can happen, and act as a guide for the correct way to use a money market account.
Money Market and Checking Accounts Working In Tandem
Money market accounts are often billed as working in tandem with a checking account, with the latter being used for day-to-day transactions, and the money market balance acting as a kind of reserve. This is a good idea, as long as you manage your checking account so that you rarely dip into that reserve.
If instead you tend to run your checking account right on the edge, such that you regularly need transfers from the money market account to bail it out, then you could incur costly maintenance and transaction fees on the money market account.
Some actual fee examples will be used to illustrate this point, but no individual banks will be singled out, because these types of fees are representative of what you are likely to find in the marketplace.
Illustration of Maintenance Fees
Maintenance fees are monthly charges just for having the account. They are usually waived if a certain minimum balance is maintained, and it is well worth making sure you stay above that minimum balance.
$5,000 is a typical minimum balance requirement, so consider this alongside the example of a $10 per month maintenance fee for balances below that minimum. If you lean on your money market account too hard, such that the balance drops to an average of $4,000 per month, you will incur $120 per year in maintenance charges. That's the equivalent of 3%; with money market rates in the neighborhood of 1.5%, that means the account would cost you twice as much as it earned.
The cost percentage would go up the lower your balance got. One bank with a $10 monthly maintenance fee on low balances also advertised that money market accounts could be started with initial deposits of as little as $25. That would make the maintenance fee the equivalent of 40%--per month!
What this shows is that money market accounts are for situations where you can deposit and maintain a fairly healthy balance. This will diminish the percentage of the account that maintenance fees represent, or better yet, cause them to be waived altogether.
Illustration of Transactions Fees
Money market accounts are required by regulation to distinguish themselves from checking accounts by limiting the amount of monthly transactions. Go over the monthly limit, and you may incur a fee for each subsequent transaction. You may also incur a fee for each overdraft transaction.
These fees are similar in amount to maintenance fees, but with one important difference. Because they are transactions-based, you can incur multiple fees in a single month. So, transactions fees can add up even more than maintenance fees.
Overall then, the lesson is that you can use a money market account in tandem with a checking account, as long as you keep enough money in both to avoid maintenance fees and keep the money market account fairly isolated from transactions.
