What is a Money Market Account?

A money market account is a specific type of savings account offered by banks and credit unions. A money market account is kind of like a combination of savings and checking accounts with high interest rates as well as a few additional restrictions.

Money Market Account Details

Most money market accounts pay a higher interest rate than a standard savings account because your money market account requires you maintain a high minimum balance. A glance at a few different accounts offered by big banks shows minimums ranging from $1,000 to as high as $3,000. The amount of withdrawals you can make from your money market account is limited usually to between three and eight withdrawals per month. Unlike a traditional savings account, money market accounts give you the option of writing checks from that account, usually restricted to three checks maximum each month. Like a normal savings account, you can close your money market account and withdraw your money whenever you want.

A big difference between traditional savings accounts and money market accounts is that you can earn a higher interest rate with a money market account by maintaining a higher budget. Before you open a money market account with a bank, find out about their specific interest policies. If you want to earn a high interest rate, look for a bank that ties your interest to the size of your account.

What is APY?

APY stands for Annual Percentage Yield. The APY is the annual rate of financial return to your account, or the amount of money you can expect to earn on your initial investment assuming that you maintain that investment for a full year. APY numbers on money market accounts may look small, but they can mean hundreds or even thousands of dollars you earn just by doing business with a particular bank. A money market account is a perfect investment account for a child’s investment fund as long as there’s a good amount of money to start with. Looking at Bank of America’s money market offers, for instance, I see that you can open a money market account with $10,00 that earns 5% interest. Over just ten years that account will earn almost $7,000 in interest alone. Obviously, a bigger financial investment means a bigger return.

Money Market Account Interest

money-market-account

When you deposit money at a bank, that money doesn’t just sit in a safe somewhere. Interest is money the bank pays into your account so they can use your money to provide loans to other customers.

After you open a money market account at your bank, they will start paying interest on the money you deposit and leave there. The bank then loans your money out to other customers, charging a slightly higher interest rate for that loan than they provide to you as an interest payment. Ideally, this is a “win / win” situation for you and the bank.

A big bonus for money market account holders is that interest on these accounts is compounded daily and paid monthly. That means your account earns interest every day that it is open, though you’ll only see the payment once a month. Compounded interest is great for consumers because it means the bank is paying interest into your account partially based on money you’ve earned in interest payments. Your money is now working hard to make you more money.

Because so many different banks offer money market accounts, you’ll find a wide variety of interest rates available. Some banks offer juicy interest rates on money market accounts to grow their customer base and get an infusion of cash they can use to offer loans. There’s nothing wrong with shopping around for that 5 percent APY — yes, it still does exist. You just have to ask banks what they’re willing to pay out for a specific minimum balance. High dollar accounts (in the millions) can earn as much as 6 or 7 percent at some banks. They don’t advertise this information . . . you have to approach them and ask.

Are Money Market Accounts Insured?

Like all bank account, the money in your money market account is insured by the Federal Deposit Insurance Corporation or FDIC. This insurance (limited to $250,000 per account) means that if the bank or credit union that holds your money market account goes out of business or “fails”, your money will still be safe.

The FDIC was created by the federal government in 1933 after thousands of banks failed in the 1920s and early 1930s and people lost their shirts. The FDIC system works so well that not a single customer has lost money because of a bank or credit union failure since the program began. Credit unions are insured too — the money in a credit union based money market account is covered by the National Credit Union Administration or NCUA, yet another federal agency. Credit union accounts are also limited to $250,000 insurance per account.

If you’re looking into a money market account, check out some accounts being offered right now and decide if earning this kind of interest on a restricted account is good for your finances.

Here’s a list of popular money market accounts from around the country, along with the APY being offered and the minimum investment. Use this as a guide when deciding to open a money market account, and remember that these account details are examples only and probably not valid much after this writing.

  • Colorado Federal Savings Bank in Greenwood Village, CO

    1.70 APY $2,500 minimum deposit

  • Bank of Internet USA in San Diego, CA

    1.60 APY $100 minimum deposit

  • Capital One Direct Banking in Glen Allen, VA

    1.55 APY $2,500 minimum deposit

  • American Express Bank, FSB in New York, NY

    1.50 APY $0 minimum deposit

  • Ultima Bank Minnesota in Fosston, MN

    1.50 APY $1,000 minimum deposit

  • Dollar Savings Direct in New York, NY

    1.50 APY $1,000 minimum deposit

  • Dollar Savings Direct in New York, NY

    1.50 APY $1,000 minimum deposit

  • Ally Bank in Midvale, UT

    1.49 APY $0 minimum deposit

  • Nationwide Bank in Columbus, OH

    1.45 APY $1,000 minimum deposit

  • giantbank.com in Ft. Lauderdale, FL

    1.41 APY $1,000 minimum deposit

  • WTDirect in Baltimore, MD

    1.41 APY $10,000 minimum deposit

  • FNBO Direct in Omaha, NE

    1.40 APY $1 minimum deposit