Money Market Accounts: What Are They and How Do They Work?

Feb 21, 2023
plant growing from money jar, the police credit union

Consider The Police Credit Union’s Money Market Account when you want to set aside a chunk of money that will grow safely and provide convenient access whenever you need liquid assets.

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When you’re in need of a financial tool that will allow you to grow your savings safely while providing convenient access to your funds as well as a return, a money market account can be an excellent option to consider. Sometimes referred to as money market deposit account or money market savings account, this product typically offers a higher-yield or interest rate than a basic savings account, and it has a wide range of uses as part of an overall financial strategy. At the same time, money market accounts are not without their own set of unique features and specific requirements that are critical to understand in evaluating your various account options. When deciding whether opening one could be a shrewd financial move for you, here are the important facts to know in order to use the account to your best advantage:

What are the major benefits of a money market account?

Essentially, money market accounts offer the interest-bearing benefits of a savings vehicle with much of the flexibility and versatility of a checking account. Along with a potential to earn a higher annual percentage yield (APY) as compared with a standard savings account and thereby grow your money faster, money market accounts often come with limited check-writing and debit card privileges. In addition, deposits in these accounts are federally insured up to the legal limit, in the same way that traditional savings and checking accounts are protected. Money market accounts also enable you to easily transfer funds between accounts, and make withdrawals at any time free of penalty or fees, provided that you meet the minimum balance requirement and don’t exceed the financial institution’s limits as they apply to specific types of transactions.

What are the transaction limits? Can you access your money whenever you want?

Unlike a savings instrument such as a Certificate or CD, you are not required to leave your money untouched for a specific period of time in a money market account, and can withdraw funds at any point. Depending on your financial needs, this can be a distinct advantage over a Certificate/CD, in which you generally must lock up your funds until a designated maturity date to avoid a penalty for early withdrawal.

However, financial institutions typically limit withdrawals and transfers from a money market account to six per statement cycle for certain types of transactions (i.e., checks drawn on the account, debit card purchases, transfers from the account, etc.). A federal rule actually required banks and credit unions to enforce caps on “convenient transactions” before the regulation was suspended in April 2020 in response to the COVID-19 pandemic.

How is your annual percentage yield (APY) determined?

Because deposits can be used to invest in short-term debt securities, money market accounts often pay higher rates than traditional savings accounts, and substantially higher rates than typical checking accounts, which are considered to be transactional accounts which provide very little or no return.

The interest or dividend rate paid on a money market account is variable, and can fluctuate on any given day according to market conditions. Rates are also tiered according to how much money is held in the account— more money on deposit will allow you to earn a higher rate of return up to a specified cap. In contrast, time deposits like Certificates or CDs provide a fixed rate of return, and offer higher rates in exchange for committing to longer terms.

What is required to open and maintain a money market account?

In general, financial services providers will require a higher initial minimum deposit for a money market account than they would for a standard savings account, and often stipulate that balances must be maintained above a certain level. Although some have a minimum opening balance of $0, you’ll usually need to fund the account with anywhere from $500 to $5,000 to get started (some financial institutions  require more to open an account or to earn its highest APY). You may also incur a monthly fee if the balance in your money market account drops below a certain threshold, so it’s important to meet the account’s specific requirements in order to benefit from its higher rates.

Is a money market account synonymous with a money market fund?

No, although their names are similar, money market accounts are not to be confused with money market funds, which are typically sold by brokerages or investment companies. Both money market accounts and money market funds are low-risk and highly liquid, and both invest in short-term debt like U.S. Treasuries, commercial paper and CDs. But at its basic level, a money market fund is an investment asset while a money market account is an interest-bearing deposit account. Importantly, eligible funds in a money market account are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on whether the account is held at a bank or credit union. Standard coverage is $250,000 per person, per institution, per ownership category. On the other hand, money market funds are not federally insured.

For what purposes does one typically use a money market account?

As a secure liquid asset that provides instant access to your cash as well as an annual percentage yield, a money market account is an ideal option as a vehicle for building and storing your emergency savings/rainy day fund. But it is also well-suited for a specific purpose such as saving for a down payment on a home, a car, home improvements, vacation plans, a big-ticket purchase, paying taxes, and other goals.

Generally speaking, money market accounts aren’t designed for long-term retirement planning needs, nor are they intended for regular spending on daily purchases and bill payments, as you would make against your checking account.  Instead, they are better geared toward saving for short and mid-range goals, and/or building a financial cushion that can protect your security, stability and well-being.

Ready to set aside money in a safe and highly liquid asset that will enable you to accelerate earnings and grow your savings without the risks associated with an investment product? The timing is perfect to take advantage of The Police Credit Union’s brand-new Smart Advantage Money Market Account! With an opening minimum balance requirement of $2,500, this product features a competitive APY and enables you to earn more money based on the activity in your Checking Account. Find details and apply here.

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APR = "Annual Percentage Rate". Actual APR is based on your credit profile and may be higher than the lowest rate available. Posted rates may include promotional discounts and other terms and conditions. APY = "Annual Percentage Yield". Rates are subject to change without notice.

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