How Do Bank Money Market Accounts Work?

Money market accounts are bank accounts that offer higher interest rates in return for a higher minimum investment than traditional savings accounts.

Money market accounts are bank accounts that offer higher interest rates in return for a higher minimum investment than traditional savings accounts.

Now that you're newly married or living with your partner, you may be thinking it's about time to start stashing some money away. While a pillowcase or your knapsack from college may offer convenient storage, they don't offer much in the way of earning interest. One option to consider is to open a money market account at your local bank or credit union.

Identification

A money market account is similar to a savings account and is available at banks and credit unions. The major difference between money market accounts and savings accounts is that the former requires a higher minimum investment, typically starting at $1,000. In return, you'll receive a higher interest rate than with a regular savings account, often comparable to those of mutual fund money market accounts. In many cases, money market accounts are protected by the Federal Deposit Insurance Corporation (FDIC).

Considerations

A money market account is considered to be a safe, conservative investment and can complement a portfolio containing other, more risky investments. However, if you're the type of person who visits your friendly neighborhood ATM several times a day, money markets are probably not for you. With money market accounts, you're usually limited in the number of transactions you can make, sometimes to as few as three per month. Because banks are paying you a higher interest rate, they expect to have greater access to your money.

Significance

According to the Financial Web website, it's probably helpful to think of a market account more in terms of being a long-term investment as opposed to a savings account. Although you'll have access to your money, it will likely be more beneficial to leave it in the account to take advantage of the higher interest rates over time. Although the interest rate fluctuates more in money market accounts, they are still perceived to be a safe long-term investment product.

Misconceptions

Be careful not to confuse money market accounts with money market funds. The latter are a type of mutual fund that invests in short-term instruments like treasury bills, certificate of deposit (CDs) and commercial paper. Although money market account interest rates are often based on money market fund rates, money market funds are not insured by the FDIC. However, they are regulated by the Securities and Exchange Commission (SEC).

About the Author

Chris Joseph writes for newspapers and online publications, covering business, technology, health, fitness and sports. He holds a Bachelor of Science in marketing from York College of Pennsylvania.

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