Money Market Savings Account

A money market savings account is essentially a hybrid; it offers consumers easy access to their funds while paying an interest rate on the balance that is usually higher than the traditional savings account interest rate. Money market savings accounts typically require a larger initial deposit than savings or checking accounts and require that the account holder maintain a minimum required balance in the account; additionally, government regulations limit the number of withdrawals per month from money market savings accounts.

How money market accounts work

Money market savings accounts are funded by deposits with banks, credit unions, and other financial institutions. These funds are then used to invest in certain short-term government and corporate loan securities that present minimal risk; these include commercial paper and Treasury notes among others. The returns on these investments vary depending on prevailing interest rates and economic conditions. Banks determine the current money market rate they will offer to depositors based on the rate at which they can lend the money through these investments; typically, the money market rate closely tracks the overall short-term securities interest rate.

Features of money market savings accounts

Money market accounts generally offer better rates of interest than standard savings accounts, but require larger initial deposits and minimum balances as well. Money market checking capability is limited, usually allowing no more than three to six transactions per month; this is due to government regulations limiting the number of money market checking transactions for these deposit accounts. In exchange, depositors enjoy governmentally insured safety for their funds and a higher rate of return than they could achieve in most other types of bank accounts. Banks in turn derive a valuable source of funds for investment, and corporations and governmental entities receive the money needed to fund their operations and meet their obligations.

Selecting a money market savings account

Finding the best money market accounts depends to a large extent upon the banks and financial institutions under consideration. Many banks offer higher, teaser rates for new money market customers who agree to a fixed term of deposit; this can add up to significant additional earnings for new accounts, but may tie up cash in an under performing money market savings account after the initial higher rate expires. Well-managed banks tend to offer the best money market accounts overall since they typically can offer larger sums on the investment market, allowing them to better control the interest rates they charge and to manage their financial affairs with a smaller profit margin per customer. While no investment is completely without risk, money market savings accounts offer a moderate potential for earnings with solid protection for principal and interest, making them a good choice for investors in cases where minimal risk is a deciding factor.

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Tim Ord
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