Advantages & Disadvantages of Money Market Accounts

by Lee Nichols

One of the first rules of thumb when it comes to investing is to not lose money. You must weigh your investment's return against the amount of risk, or chance you are taking of losing your initial investment. One of the safest investments is a money market account. Similar to savings accounts, many money market accounts are federally insured and pay interest on the balance in the account. However, the financial institution may require that you maintain a minimum balance in the account to prevent paying additional fees.

Return Rate

Investors typically receive a higher interest rate on money market accounts than other federally insured accounts. While rates have fallen since their inception in the 1980s, they still pay a higher rate than traditional savings accounts. Unlike savings accounts, financial institutions base the interest rate earned in money market accounts on the amount of their balance. With a tiered-rate account, a larger balance in your account means that the institution pays a higher interest rate. The interest rate of money market accounts can change because the financial institution determines the rate based on current market rates.

Minimum Balances

If you do not maintain the minimum balance required by the financial institution, you will incur additional fees and, possibly, receive a lower interest rate on the account. You will not receive the best rate available unless you maintain a balance of at least $10,000, according to Bankrate.com. Since you can write checks on a money market account, it is essential that you keep track of your expenditures to ensure that your account does not drop below its required balance.

Insurance

Unlike stock market investments and mutual funds, money market accounts issued by banks generally have the built-in protection of being insured by the Federal Deposit Insurance Company. The FDIC reimburses money market account holders up to $250,000 per signature on the account if the financial institution fails. In this case, money market account holders have the same protection as checking or savings accounts. However, you need to be careful with money market accounts -- some accounts may not enjoy FDIC guarantees. Ask your broker or check your prospectus to make sure that your account is covered. If it's not, either demand a much higher rate of return for leaving your money there, or move your money to a more secure account.

Fees

Though you do not have to pay management fees for money market accounts, the same as investors in mutual funds do, you will pay fees if your balance falls below the required minimum. Holders also incur fees if they write more checks on the account than their financial institution allows. Unlike typical savings accounts, as long as you remain in compliance with the terms of your account, you have not pay monthly service fees.

Access to Your Money

Money market accounts are open accounts. This means that unlike most other investment accounts, you can withdraw funds anytime without incurring a penalty. While you must still maintain the minimum balance, the funds above that minimum are available for your use. Read your account terms to determine if your financial institution limits the number of monthly withdrawals you can make without incurring fees.

Selecting a Financial Institution

Most banks and credit unions offer money market accounts. Selecting the best place for your money requires a little homework before you open an account. Call local financial institutions and ask about their balance requirements, interest rates and fees. Ask about ATM access and how many withdrawals the account allows each month. Look at online money market accounts to see how they compare with local accounts. Online providers may have more pleasing terms for you because they do not have the expenses that your local institutions have. If being able to walk in and talk to a person is important to you, however, an online bank may not be your best choice.

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