Money market accounts
Saving money for a rainy day requires
discipline -- and sometimes a bit of hand-holding, too.
Enter the money market account. It combines
the liquidity of ready cash with the knuckle-rapping discipline
imposed by a federal limit on certain transactions.
A money market account is a savings account
offered by banks and credit unions, insured by the Federal
Deposit Insurance Corp., and requiring a high minimum balance
-- averaging between $100 and $2,500.
The discipline derives from a cap. By law, you are allowed
to make no more than six withdrawals and transfers per month if
the transactions are overdraft protection transfers, automatic bill
deductions, wire transfers, telephone transfers and PC banking transfers.
However, money market account holders are usually allowed to make
unlimited free deposits and withdrawals from ATMs in their network.
Money market account holders are allowed to
write up to three checks per month. If the owner exceeds the allotment,
a bank often will charge between $5 and $15 per check. Repeat offenders
may have their accounts closed.
Many financial planners maintain that an individual
should have three months to six months of cash or cash equivalents
-- checking accounts, savings accounts and CDs -- on hand for emergencies.
For medium-term expenses, such as saving for a down payment on a
car or furniture, a money market account can be the ideal choice,
says Ilyce R. Glink, the author of "100
Questions You Should Ask About Your Personal Finances."
"You should move enough money into your non-interest-bearing
checking account to pay your bills, while a larger reserve should
be kept in money market accounts to gain a higher rate of return,"
Some families use the interest that their money
market accounts earn each month to pay off credit card bills or
handle emergencies. Money market accounts provide a higher rate
of return than a regular savings account. The current average rate
of return on a basic money market account is 2.16 percent, compared
to 0.49 percent on a passbook savings account and 0.48 percent on
a statement savings account, according to Bankrate.com data.
"For money that you plan to hold for a short
period -- three months to a year -- and that needs to be liquid,
a money market account is probably your best bet," says Ron Meier,
a professor at the College
for Financial Planning in Greenwood Village, Colo.
trio of types
There are three types of money market accounts:
- The basic account often requires a minimum
opening deposit of $100.
- The tiered account often requires a bigger
minimum opening deposit than a basic account but pays a higher
yield as deposits increase. For instance, an account holder might
earn 2 percent interest with a $500 balance, but as much as 5
percent interest or more with a balance of $50,000.
- The package deal offers a money market account
in conjunction with savings, certificates of deposits and other
bank investments. Banks and credit unions may offer a slightly
higher yield to holders of these accounts than to basic- or tiered-account
holders. Because this is a package deal, a minimum deposit may
Some financial institutions will link a money
market account with a checking account, so if the holder needs to
cover a standard check written yesterday, the money will automatically
be transferred from the money market account. If the account holder
keeps more than $2,500 in the money market account, some financial
institutions will waive certain fees or provide added incentives,
such as a free checking account.
Here are some questions a consumer should ask before opening
a money market account:
- What is the minimum opening deposit?
- What interest rate does the account pay?
- Are there higher yields for bigger balances?
- Do I earn higher yields on the entire balance
or only part of it?
- Is there a monthly maintenance fee?
- Under what conditions can fees be avoided?
- What is the fee if my balance drops below
the required minimum?
- Will the bank waive fees if I have other
accounts with them?
- Is there an extra fee if I close out my account
- What's the fee for writing more than three
checks a month on the account?
- What's the fee for using automated teller
- Is there more than one version of a money
market account? If so, what are the differences?
Money market accounts and certificates of deposits
are two of the most popular forms of savings because they are safe
havens for many individuals who want to avoid the risks of the stock
market, say some financial planners.
Locating the best deals means shopping around.
Bankrate.com tracks money
market account rates at banks and credit unions nationwide