Want to learn about the money market or need a money market account? Look no further!
In this complete guide to the money market, I’ll give you an overview of the money market, tell you what is a money market account and how to use it.
Finally, I’ll wrap up with my top three recommendations for money market accounts.
Overview of the Money Market?
A money market trades securities just like how a stock market trades public company stocks.
Money market securities are securities that can be quickly and safely turned into cash. In other words, they’re securities with high liquidity and low risk. This market exists so that governments and businesses can borrow money to manage their short-term cash needs.
In financial jargon, these securities are short-term, high quality debt securities with original maturities of one year or less. Here are a few examples of money market securities:
- Treasury bills: Also known as T-bills, treasury bills are short-term debt instruments issued by the U.S. Treasury. T-bills are issued for a term of one year or less. They’re considered the world’s safest debt as they are backed by the United States government.
- Certificate of Deposit (CDs): A CD is an interest-bearing bank deposit that has a specific maturity date between three months to five years and a stated interest rate. They are issued by commercial banks but can be purchased via brokerage firms.
- Commercial Paper: A commercial paper is an unsecured, short-term loan used by a corporation to operate its business. Maturities on commercial papers are usually one to two month and not longer than nine months.
The money market trades many other securities, from Banker’s Acceptance, Eurodollars, to Repos. But you don’t need to understand them to put your money into the money market. All you need is a money market account.
What is a Money Market Account?
A money market account is basically a savings account; you can open one at a bank. When you deposit money into a money market account, the bank will pay you interest. Your bank decides what to invest in the money market but that’s irrelevant for you because your interest on your money market account is predetermined. Like a savings account, your money market account is also protected by the FDIC insurance so your deposit is safe.
Do not confuse a money market account with a money market fund. A money market fund is a type of mutual fund often called “fixed income”. Money market fund still invests in money market securities but you buy it via a brokerage like Vanguard. While a money market fund seeks to be liquid and safe, you can end up with less than what you put in. This guide will only focus on money market accounts. We’ll talk about money market funds in a different guide.
Should I Get a Money Market Account or a Savings Account?
Compared to a savings account, a money market accounts (MAA) has historically offered higher interests. But the reality in today’s low interest rate environment is no longer so. These days, MMAs and savings accounts have roughly the same interest rates. Legally, money market accounts are regulated in the United States as savings accounts under Regulation D (FRB). Is there any difference between these two account? Read on:
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From the comparison chart above, the only difference seems to be MMA’s ability to write checks and use debit cards. This difference in small, but if you still write checks (e.g, to pay rent) or use a debit card for large purchases, you might consider an MMA over a savings account. On the other hand, MMAs can have higher minimum balances, so make sure you are eligible before you apply.
Decide on a case by case basis whether to get a money market or savings account
Interest rates and other requirements on a money market account can vary from bank to bank and for each account. I suggest you shop around before deicing which account to get and from which bank. First, look at what various banks are offering. Make sure to check out online banks, national banks, and your local banks and credit unions. Look at interest rates and pay close attention to account requirements on any minimum balance and withdrawal cap. You want to first narrow your list of choices down to eligible accounts that meet your needs.
Then, simply choose a money market account or a savings account with the highest interest rate. Once you decide on an account, keep an eye out on changes. Interest rates on these accounts often fluctuate over time and your own preferences may change as you become wealthier.
How to Use a Money Market Account
Think of a savings or money market account as something that sits between your checking and investment. You want to put the majority of your savings into your investment account so it can grow. You want to put as little money as possible into your checking account because it does not offer you any interest. After investment, put as much as you can into your money market or savings account so it can earn some interest.
Store your emergency fund in a money market account
Your MMA could store money you do not need right away. This includes your emergency fund and money for big purchases you know you will incur soon. By putting your money here instead of the checking account, you will get some interest and your money is still safe and accessible.
Route your income (direct deposit) into your MMA
Consider routing your payroll (direct deposit) directly into a money market or savings account. This way, your income is earning you interest as soon as it arrives. You can then transfer this money into your checking account if needed.
Pay your monthly credit card bill from an MMA
Credit card spending often accounts for a big portion of one’s monthly expenses. Since your direct deposit is already in your MMA, consider paying your bill via your MMA too. Credit card bills are paid once a month so you’re will still under the six per month withdrawal limit. This way, you can keep a very low balance in your checking because your major income and bill now go through your MMA.
Pay your student loans and rent from an MMA
You can also pay your monthly student loans, rent, and any other big purchases via your money market account. As long as the total number of monthly withdrawals is below the cap, usually six withdrawals per month, your money will be earning interest while it is waiting to be spent.
Use your checking account only as a last resort
By keeping most of your fund in your MMA or savings account, you’re maximizing your interest while paying your bills. Keep enough money in your checking account to do things only a checking account can do. I use a checking account to withdraw cash from the ATM and to transfer money to my Venmo. You may use it differently. I usually keep my checking account balance below a thousand dollars. You may want it lower or higher. Meanwhile, my money market account, at an interest rate of 2.2%, earns nearly five hundred dollars a year. Your earning will depend on your total deposit. Either way, this is free money that we automatically make while living life. Over the course of multiple years, this money definitely adds up.
My Top Three Money Market Accounts
I’ve researched over a hundred money market accounts and here are my top three. Big caveat: interest rates change all the time, so take time to do your own research. Don’t go crazy over tiny differences in interest rate. The difference in interest between a 1.41% rate and a 1.42% rate is only $10 for a $100,000 deposit. Also, look at your local banks and credit unions for rates exclusive to local residents. My current savings account belongs to a local bank and it offers by far the best interest rate.
UFB’s Money Market account offers a annual interest rate of 1.41% with six transactions per month to write checks and use debit card. However, this account requires a minimum deposit of $5,000. You will also get online banking and the ability to deposit checks into this account from a mobile app. This is the best option (outside of anything you can find with your local bank) for people with a high enough balance. The UFB is FDIC-insured.
All America Bank is a community bank in Oklahoma that offers nationwide online banking. Its “Mega Money Maker” account offers 1.50% APY for balances up to $35,000, and 0.50% for balances above $35,000. You also get a free debit card. Checks are available but they are not free. If you have well under $35,000 then this is the account for you. All America Bank is FDIC-insured.
Ally Bank does not offer the highest interest rate, but it does offer you the ability to open a checking and a MMA together. In the event you over-withdraw from your checking, money will be automatically transferred from your MMA to your checking with no overdraft or transaction fee. You can also access your MMA with your ATM card, which has free AllPoint access and up to $10 from non-Ally ATM fees reimbursed every month. Do you over-draft often and incur fees? If so this account might be ideal.
Key Takeaways: Money Market Accounts
In this guide, I gave an overview of the money market, explained what is a money market account, and gave you my top three recommended money market accounts to sign up for online, and suggested that you look into your local banks and credit unions for what they can offer to local residents.
We also discussed why you might use a money market account to…
- Deposit your direct deposits and other income
- Pay your credit card bill
- Pay rent and student loans
- Store your emergency fund and money for upcoming purchases
Remember: a money market account offers similar interests as a savings account these days. They’re very similar except MMA may have a slight edge in check-writing capabilities. You should store most of your cash outside of your investment into a savings or money market account. I hope this is helpful. If you any questions, feel free to add it in the comment section.
Want to learn what is a money market fund? See our guide.
Want to know about other (potentially even better) ways to park the cash between your checking and investment account? Read this comprehensive guide on the best ways to store cash.