If you want a better return on your FDIC-insured investment but fear the commitment of a CD, it might be time for you to consider a money market account.
Money market accounts act as a bit of hybrid of other banking products. Unlike a savings account, you can pay directly from your MMA. It is like a checking account, but you are limited to six transactions a month. And it pays a higher interest rate because of those restrictions, but not quite as high as one you’d get with a CD.
Follow these five steps to get the best MMA rate.
Make sure it’s what you want
You may sacrifice some yield when you open a money market account. Decide now if that’s OK because CDs pay more. The typical five-year CD pays about nine-tenths of a percentage point more than an MMA, according to Bankrate’s latest national survey of interest rates at banks and thrifts.
If you put $10,000 in a CD that carries a 2.40 percent APY, you’d have $11,259 by the time it matures, according to Bankrate’s CD calculator. If you took advantage of the 1.30 percent APY MMA offer, you’d have $10,667 after the same time period.
What does that $592 difference mean to you? Is it worth it if in exchange you have immediate, penalty-free access to your money? Or is it time to get over your commitment issues?
Decide how much access you need
The key distinction between a money market account and a savings account is the ability to move money directly from the account.
So long as it is less than six transactions a month, you can pay bills or cover other expenses through your MMA. Savings accounts, for comparison, typically don’t allow you to make direct transactions with others; you often have to transfer money from your savings to your checking account to use it.
This distinction is important because the interest the best savings accounts and money market accounts pay is currently pretty close.
If you don’t see transferring money from your savings to your checking in order to use it as an inconvenience, you may find a savings account is a better fit.
Whenever you shop for a new financial product, your first stop should always be your existing bank. Seeing what it has to offer is smart: It should be easier to open a new account at a bank with which you already do business and having your money all in one place often makes the most sense.
Unfortunately, if your primary institution is a large one, you’re likely going to find the offerings lacking. The largest banks in the country are typically the ones who pay the least.
Although you shouldn’t be worried to work with banks in another state or region of the country, you should also check out what local banks and credit unions have to offer. In fact, sometimes the best deals are only available to locals.
Consider online banks
If you’re already considering banks with no branches near you, you might as well consider banks with no branches, period.
Shop for a money market account from an online bank to see what they offer.
Because they save money on things like branches, tellers and other costs related to operating physical locations, online banks consistently pay the highest interest rates.
Also, you might really like their mobile apps and websites. Traditional banks see apps and websites as one more avenue to interact with customers. For online banks, websites and mobile are the only channel. In that case, they better be good.
Read the fine print
You need to understand what you’re getting, because there is more to money market accounts than interest rates. Before signing up for a new account, understand the minimum balance, the monthly fees and the ability to write checks, because they are going to range wildly.
Also, check to see if your great rate is promotional. What is market-leading today, could become subpar a year down the road when it resets.