Money Market Accounts – Explained
Money Market Account Explained
Typically, a money market account will have a higher interest rate than a checking or savings account because of the additional requirements to opening and maintaining one. A money market account will usually require a higher minimum balance to open and to earn interest. The account will also have to usually maintain a higher monthly balance in order to keep from being charged monthly fees.
A money market account is not the same as a money market fund. A money market account is offered by a bank; a money market fund is offered by a brokerage. The two products have similar investment strategies, but beyond that, they are completely unrelated.
A money market account is a deposit account, meaning that an investor can deposit funds into the account at any time. Funds deposited immediately become subject to the rules of the money market account.
In the United States, a deposit account is also considered savings, but the unique structure of a money market account allows checks to be written on the account as well. Regulation Q is a federal regulation which forbids banks from paying interest on checking accounts. As money market accounts are not checking accounts, they can have checks written on them while still bearing interest.
However, money market accounts are not considered transaction accounts. Therefore, a money market account is subject to regulations on savings accounts, including a maximum of six withdrawl transactions to third parties per month. Banks can impose additional limits on accounts above and beyond this federal limitation, and banks usually will deter investors from reaching or exceeding this maximum by instituting high fees or total forfeiture of the account.
ATM transactions are at the discretion of the bank as to whether they will be counted as transactions against the federal regulation.
Today, money market account is suffering from two evils: low interest rates and high inflation. With the Federal Funds Rate currently set at virtually 0 percent, interest rates have been tracking Treasury bond yields. Rising oil prices in the first half of 2011 raised the official inflation rate, giving money market account a one-two punch. These accounts currently suffer from negative real yields. The longer an investor holds his money in these accounts, the more he loses his money to inflation. Fortunately, this situation appears ripe for change. With oil prices down from their highs in April and early May, inflation may recede somewhat.
Treasury bond yields have been tracking optimism vs. pessimism in the economy. When the Federal Reserve announced a second round of quantitative easing in November 2010, Treasury bond yields rose precipitously. This reflected increased investor optimism as Treasury bonds were sold and investors put their money into stocks. Then, the turmoil in the Middle East (the so-called “Arab Spring”) sent yields racing downward again amid rising oil prices. As the war in Libya and other Middle Eastern countries continues, investor optimism is increasing again. This is due to low oil prices, resulting in slowly rising Treasury yields.
Falling oil prices with rising optimism create a favorable situation for money market accounts. Oil prices have been the biggest driver of inflation in recent years. Since they are now well below their highs earlier this year, inflation appears tamed, at least according to official numbers. June 2011 Consumer Price Index inflation was reported at 3.6 percent. The 10-year Treasury bond currently yields 3.1 percent, a difference of 0.5 percent. As yields increase, returns on money market accounts may turn positive again. This is a favorable situation for savers as rising rates give them more on their money.
Money Markey Accounts: A Great Way to Save Is Not Spending
Everyday we all spend money we probably do not need to: a candy bar, a movie, a new surround sound system, a new shirt. Whatever the reason, it is hard to save money. It is your money after all, right? Why not spend it? You may not want to spend for any number of reasons including a nice vacation, a new car, or emergencies like car repairs or medical reasons. Whatever your reasons for wanting to save money, you may want to consider a savings account. After all, a checking account is in place for you to spend not save.
A money market account may just be the perfect way for you to save that little bit of extra cash for that proverbial rainy day. A money market account is simply a deposit account, much like a checking or savings account, and very easy to find one and open one. They have better interest rates than most checking and savings accounts, making it a great way to earn money with your money, in addition to helping you save.
If you want unlimited access to your account, though, a money market account is probably not the best option for you. Actually, the limited access is exactly what makes an MMA so valuable — out of sight, out of mind. Banks encourage you to keep your fingers out of the dough with a few requirements. You will most likely be limited to six transactions per month. Any extra withdrawals will invite a financial slap on the wrist in the form of fees. Also, most banks require to keep a minimum balance to open and sustain a money market account. This amount may be pretty high, so plan ahead: begin saving and create a financial cushion, too. The last thing you want to do is drop below the minimum. Not all banks are the same, and some have hefty fees and others may even close your account if it stays in default for too long. In this case, you would probably lose all interest earned on the account.
Another great way to keep your hands out of the cookie jar is to keep your accounts separate. You may be offered the tantalizing option of linking your checking and money market accounts, or even linking to your debit. Try to resist the carrot on the stick. It is far easier to spend your money when it just a few button pushes or a swipe away. Going to the bank might be just annoying enough to keep you from touching your money. In addition, contemplate setting up an automatic deposit to further avoid using money that can easily help your account grow and gain more interest.
Money market accounts may be the easiest, painless way to keep your money out of your own hands. But you may also want to consider CDs and CD Ladders. What ever you choose comparing and shopping around is crucial to finding the best one for you. It will undoubtedly pay you in long run.