Do you have a large amount of cash that needs to stay liquid along with a competitive rate?
What is a money market deposit account?
A money market deposit account (MMDA) is a high-yield savings account that allows depository financial institutions to be more competitive with money market mutual funds. MMDAs are insured by the Federal Deposit Insurance Corp. (FDIC), and they generally earn interest at a higher rate than standard savings accounts.
Banks and brokerage firms invest the money held on deposit in MMDAs in short-term debt obligations. This may sound similar to a certificate of deposit (CD), but it’s quite different. MMDAs differ from CDs in that there is no holding period on the money. Account holders can draw on funds in MMDAs as often as they need to, although they might have some withdrawal limits over a certain period of time.
Additionally, MMDAs offer lower interest rates than CDs, mostly due to the variability of available funds. A CD has to be held on deposit for a specific amount of time, so the financial institution can use it for investment and loan purposes.
MMDAs offers account holders check-writing capability, making it a hybrid account that has the features and benefits of both traditional checking and savings accounts. Investing in an MMDA often requires the customer to maintain a higher balance than what is required for a standard savings or checking account. That feature prohibits some customers from opening an MMDA.
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Arnold has $5,000 burning a hole in his pocket and would like to put the cash into a very safe investment. Arnold doesn’t want to put the funds into a CD because he would not be able to access the money whenever he needed to, so he chooses an MMDA because the yield is higher than a regular savings account and he can write up to five checks a month against the account. Although he won’t have the unlimited access to the funds that a regular checking account or savings account would offer, the MMDA earns more and offers Arnold the flexibility he needs.