Money market accounts are back in vogue, and annual percentage yields above 4% on MMAs at relatively low minimum deposit levels are a big driver of that trend.
Given Federal Reserve interest rate hikes, which push bank rates up historically, investors expect money market rates to remain at this level for the next few months.
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In addition, money market fund assets rose by $47 billion, to $5.3 trillion, for the week ended May 3, according to the Investment Company Institute. One reason for the pump-up in fund activity is interest rates, which were in the 4.3% to 4.5% range over the same time period. That’s a significantly higher range than the roughly 2% rate bank investors saw in late 2019.
Before you dial in on a money market account or fund deal, let’s take a look at what they are, how they work, and what, in general, money market accounts bring to bank investing:
— What is a money market account?
— Origin of money market accounts.
— Money market account pros and cons.
— Money market account vs. money market fund.
— How to invest in a money market account.
What Is a Money Market Account?
A money market account is a financial investment deposit vehicle that blends the characteristics of a bank savings account with checking account-like features.
Offered primarily by banks and credit unions, money market accounts usually come with high-interest-rate returns compared with bank savings accounts, sometimes 2 percent or even 3 percent points higher than regular bank savings account rates. (Note that lately, top high-yield savings accounts are also sporting competitive rates; Synchrony Bank recently offered a 4.15% annual percentage yield on its high-yield savings account, for example.)
Banking consumers may have to steer more cash into money market accounts, as participating financial institutions usually ask for higher minimum deposits for MMAs.
Origin of Money Market Accounts
Money market accounts originated in the 1970s and began flourishing in the 1980s, primarily from the 1980 Depository Institutions Deregulation and Monetary Control Act, which eliminated cap restrictions on bank savings rates.
With no cap on interest rates, banks drew in savers who valued the security of a traditional savings account but were attracted to the higher interest rates generated with money market accounts. No wonder: The benchmark federal funds rate stood at 14% in 1980.
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Money Market Account Pros and Cons
Money market accounts may appear to be like traditional checking accounts, but there are some unique variables involved. Here’s a look at the upsides and downsides of money market accounts:
Money market accounts have higher interest rates than traditional checking accounts. That means more money in the pockets of bank investors who opt for a money market savings strategy.
Check writing allowed. Money market accounts also offer check-writing privileges, thus enabling banking consumers to pay bills and buy goods and services with the stroke of a pen.
Debit card features. Money market accounts also feature linked bank debit cards, which gives users more spending freedom when using the accounts.
Uncle Sam has depositors’ backs. Like regular bank savings accounts, money market accounts are government-protected up to $250,000 per account depositor, via the Federal Deposit Insurance Corp. or the National Credit Union Association. It’s fairly rare to see an investment vehicle that can produce rates of return of 4% or more and also earn federal government asset protection.
Minimum deposit. Money market accounts are limited somewhat by minimum deposit requirements. The amount of the minimum deposit varies from bank to bank and from credit union to credit union. A money market consumer may see a minimum deposit of $25 at one bank and $5,000 or even $10,000 at another bank. The higher the deposit, the greater the yield, in many cases.
Withdrawal limits. Money market accounts also often come with withdrawal guardrails. Historically, those limits were no more than six withdrawals per month, via the federal Regulation D limits. During the pandemic, however, those cap restrictions were lifted as a federal rule, although individual banks were allowed to place their own individual withdrawal limits.
Account users may be forced to pay a penalty fee for excessive withdrawals.
Higher management and service fees. Besides generating fees from check writing, banks and credit unions also charge high operational fees for MMAs relative to savings and checking accounts. It’s not uncommon to find monthly money market account fees as high as $10, $15 or even $25 per month — significantly more than regular savings and checking accounts.
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Money Market Account vs. Money Market Fund
Money market accounts are not money market funds, and bank depositors need to be aware of that. Here’s how they differ:
Money market deposit accounts. Money market accounts are basically a savings and checking account hybrid that generally pays a higher interest rate than a traditional bank account.
The rate of return is set by the individual bank and is a fixed rate. Cash withdrawals are generally limited by most banks and credit unions, and there are service fees and withdrawal fees tied to money market accounts.
Money market accounts of up to $250,000 per depositor are guaranteed by the U.S. government, in the form of the FDIC.
Money market funds. As the name suggests, a money market fund is a form of mutual fund, complete with a net asset value of $1 per share and a modest, but not guaranteed, investment return.
By and large, money market funds comprise short-term investment securities with a duration of one year or less. Common securities included in a money market fund include short-term obligations generated by corporations or the U.S. government, U.S. Treasury bonds and notes, and high-grade commercial paper, or unsecured, short-term debt instruments issued by corporations.
While money market funds are usually a stable, conservative capital-appreciation vehicle, don’t expect returns to outpace inflation or outperform more aggressive funds that include stocks and commodities.
Unlike money market accounts, money market funds are not insured by the FDIC or NCUA.
How to Invest in Money Market Accounts
Financial consumers can open a money market account directly at a bank or credit union, or via online banking and credit union platforms. The experience is similar to opening a bank savings or checking account.
For example, here are three offers by top money market accounts as of May 5 that are FDIC-insured up to $250,000 per depositor:
— Vio Bank Cornerstone Money Market Savings Account: 4.85% annual percentage yield, or APY, with $100 minimum deposit, no monthly fee and six free withdrawals per month.
— Ally Bank Money Market Account: 4% APY with zero minimum deposit, no monthly fee and free Allpoint ATM withdrawals.
— UFB Direct Premier Money Market Account: 4.81% APY for all balance tiers, $5,000 minimum deposit, no monthly fee on a $5,000 balance (otherwise it’s $10), six free withdrawals per month.
If you don’t need immediate access to cash for a set period, then a certificate of deposit or high-yield savings account could be preferable, depending on your situation. But if you want to keep savings on hand in case of emergency and you can meet the minimum deposit requirements, money market accounts are very attractive now.
Here are three important points to remember when investing in a money market account:
— Money market accounts are interest-generating accounts offered by banks and credit unions.
— Money market accounts usually pay higher interest rates than traditional bank savings or checking accounts. Fixed-rate returns of 3% or 4% are not uncommon with money market accounts, compared to 1% or 2% for many bank savings and checking accounts.
— Money market accounts are insured by the FDIC and NCUA for customer deposits of $250,000 or less.
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Money Market Account: What Is It and How Does It Work? originally appeared on usnews.com