What is Money Market Account?
A money market account (MMA) is an interest-bearing account and pays fixed interest on the money deposited. It also has cheque-writing and debit card privileges similar to a savings account. However, it pays a higher interest than a regular savings account. Therefore, it acts as both a saving and investment avenue.
- Interest: The interest paid by MMA is slightly higher than a regular savings account.
- Debit card access: This account provides a debit card so that money can be withdrawn easily when needed.
- Liquidity: MMAs are very liquid. You can withdraw money whenever you want from your account.
- Transaction limits: It has a restriction on the number of times you can withdraw money from your account. Hence it is less flexible than a savings account.
- Minimum investment limit: MMA’s have a minimum investment limit, which is not the case for a savings account. Moreover, you are required to maintain a minimum balance in your account at all times. If the balance falls below a certain limit, then you will have to pay the penalty (fee).
How Does a Money Market Account Work?
Similar to a savings account, an MMA pays a fixed interest. However, it pays a higher interest than a savings account which fluctuates based on market conditions. The account also has debit cards and a chequebook facility that allows you to withdraw money whenever you want.
However, there is a limit on the number of transactions or withdrawals you can do in a month. Moreover, you will have to maintain a minimum balance in your account at all times, or else you will have to pay a fee as a penalty.
Hence the MMA can be used only as an investment vehicle and not a substitute for a savings account.
Advantages & Disadvantages of Money Market Account (MMA)
- High fixed interest: MMAs pay a fixed interest which is higher than a savings account.
- Liquidity: Money can be withdrawn anytime from your money market account.
- Ease of access: The money in your account can be easily accessed using a debit card or cheque.
- Restriction on withdrawals: It has a restriction on the number of times the money can be withdrawn from your account. You can also write only a limited number of cheques every month.
- Minimum balance: It requires you to maintain a minimum balance at all times. Moreover, when investing in it, you will have to invest a minimum amount set by the bank.
Frequently Asked Questions
Yes, money market accounts are very safe. They are just like savings accounts that pay a fixed interest, and you can access the money anytime you want.
A savings account is suitable for parking cash you use for your expenses or basic savings. In contrast, a money market account can be used to park your emergency fund or money for your short-term goals.
Yes, the money in your account can be withdrawn using a debit card or chequebook. However, there is a limit on the number of withdrawals you can do in a month.
Both MMA and CD are bank products offering a lower interest rate. However, MMA can prove to be a better option when it comes to ease of access and cash withdrawal without penalties. Additionally, the relatively higher interest rates compared to CDs makes them more attractive. On the other hand, CDs offer better interest rates for long-term investments if the money is not withdrawn.
The money market account no doubt offers easy access to your invested amount, but at the same time, it also carries lower interest as compared to other investment schemes. An investor might consider investing in these accounts as a part of the entire investment portfolio but not as an individual investment option.
Interest for these accounts may vary from one bank to another in addition to the amount deposited in this account. The interest rate for these accounts is changing over time and has dropped over the last ten years.