Money market accounts (MMAs) are relatively safe investments that usually pay more interest than a regular savings account. The interest rate will change depending upon the amount of your deposit. Here's what you need to know.
What Is a Money Market Account?
MMAs, which are also called money market deposit accounts, offer better interest rates than savings accounts. In some cases the interest rate may be twice that of a regular savings account. Many people use them to park cash they want to have quick access to for future purchases. For instance, if you sell off shares of a mutual fund, the proceeds may be placed into a money market account until you decide what to do with it.
With a MMA you'll usually be restricted to writing only a few checks each month. Also, some banks have minimum balance requirements while others don't. It's not uncommon to have a minimum balance requirement of $1,500 to $2,500.
One of the main reasons people put their money in a MMA is because the accounts are considered less risky than other investments. The money in an MMA is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. So even if your bank goes out of business your money will be safe.
Why Open a Tiered Money Market Account?
Having a tiered MMA means that the more your money grows, the more you'll earn. Once your money reaches a certain amount your interest rate will be increased. Regular savings accounts don't offer this feature. With a tiered account, your interest rate will increase each time the balance rises to a certain level. For instance, you may see an interest rate increase when your balance reaches $2,000. These accounts are a good deal for people who have large amounts of money they don't want to leave in a low-interest savings account.
How to Open an Account
You can ask about MMAs at your local bank or shop around for one on the Internet. In many cases you'll get a higher interest rate with an Internet account. When you deposit your money, the money manager for the MMA usually invests them in T-bills, savings bonds, CDs, or other investments that are considered relatively safe.
Many people confuse money market accounts with money market funds. Money market funds are not FDIC-insured and are basically mutual funds that hold short-term debt investments.
Money market accounts aren't going to pay as much as a lot of more risky investments. But if you want to know that your money is going to be safe and easily accessible, a MMA may be a good choice.
"Sizing up 'safe harbor' money investments," by Walter Updegrave, www.cnnmoney.com.