Money Market Accounts vs Savings Accounts

Money market accounts definition. money market accounts are very similar to savings accounts in fact a money market account is a type of savings account that allows easier ways to access your money for example a debit card can be used to make purchases or withdrawals from an ATM.

Before online banking became prevalent, a money market account differed from a savings account by having a minimum balance to earn interest and by allowing check-writing (up to 6 checks a month) against it.

Recently banks have been turning to debit card transaction fees to boost their revenues.

For example, Ally Bank offers a money market account that pays as much as its savings account but it comes with check writing privileges and a check card.

Be aware that both savings accounts and money market accounts are governed by federal law that states you may only make up to six withdrawals per month except for ATM withdrawals which are unlimited.

To be clear, you can only make up to six withdrawals using any combination of these methods:

• electronic fund transfers
• telephone transfers
• checks
• debit card purchases

What happens if you go over the limit of six? Youll be charged a fee of $10 for each additional transaction.

If you get charged a $10 fee once, on a money market account earning 1.40%, it equates to losing a years interest on $714 dollars. Good for the bank, bad for you and your annual savings yield.

Money Market Accounts Rates

Unlike certificates of deposit, money market accounts rates are variable and fluctuate with the current interest environment. Factors that influence money market rates include Treasury bond yields, financial strength and strategy of the money market bank, and the level of competition within the banking industry.

Here is a chart of the 3 year treasury yield:

(Chart courtesy of ForeCasts.org )

The best way to know if your money is working hard enough for you is to compare your money markets APY to the nations best money market rates .

Money Market Accounts FDIC Insured

Money market accounts are FDIC insured as long as the bank or credit union is FDIC/NCUA insured.

Dont confuse money market accounts with money market funds. Money market funds are open-end mutual funds that invest in T-bills, CDs, and commercial paper. Most money market funds dont qualify for FDIC insurance and can lose your principal. However, if the money market fund is administered by a bank, it will be FDIC insured. Currently some banks money market accounts interest rates yield more than you can get from money market funds.

Money Market Accounts vs CDs

The main differences between CDs and money market accounts are liquidity and term. CDs range in term from 3 months to 10 years. CDs give you the option to receive interest disbursements monthly, quarterly, or yearly. While, you can receive regular earned interest payments, you cannot withdraw the full principal from a CD until its term is completed without a penalty. Early withdrawal fees range from 1 month of simple interest to over a year of interest. The longer the term of the CD, the bigger the penalty will tend to be. Some banks like Ally Bank have a fixed penalty of three months simple interest no matter the term of the CD. This lowers the risk of committing to longer CD terms.

For example, as of this writing, Ally Banks 5 year CD earns twice the interest as the 1 year CD. That means you can earn twice the interest with the same level of risk 3 months of simple interest penalty. The number one rule of the banking game is to read the fine print, before purchasing a CD, make sure you know:

• minimum deposit amount
• any and all fees
• automatic renewal some banks will automatically reinvest your funds into a new CD unless you notify the bank before or at maturity
• grace period does the bank have a grace period after maturity when you can withdraw your funds penalty free? (Ally Banks grace period is 10 days)
• early withdrawal penalties
• early withdrawal restrictions (some banks simply dont allow early withdrawals)

If you want to earn above the average yields, open a long term CD with a bank that charges a small early withdrawal penalty and that allows early withdrawals.

Ally Bank is one of the best candidates for this strategy.

You can easily earn more with a long term CD than a money market even if you pay an early withdrawal fee as long as you can keep your funds in the account for at least four months.