Money market accounts are often considered to be safe investments because they offer higher interest rates than other types of savings accounts.
Money market accounts are offered by banks and credit unions. They are designed to provide investors with a convenient way to save their money without having to worry about fees or minimum balance requirements.
A money market account offers several advantages over regular savings accounts. For example, you can usually withdraw funds from your account at any time without penalty.
However, these accounts also come with some disadvantages.
This article takes a look at money market accounts more closely and looks at the disadvantages to work out if opening this type of account could be the right decision for you.
What Is A Money Market Account?
A money market account is an investment account that allows you to earn interest on your deposits.
Money markets are usually interest-bearing, and this means the money that you deposit can grow over time with interest, much like a savings account.
But unlike a savings account, you can often write checks from a money market account or have a debit and ATM card which you can use either to withdraw money or make purchases.
Depending on the bank or credit union, you might however need to meet a minimum deposit to be able to open a money market account.
The bank can also charge monthly maintenance fees, check-writing fees, and other fees to keep open a money market account.
The interest rate and APY you can earn on deposits in a money market can also vary depending on which bank you open an account with.
You should make sure your money market account is opened at a secure bank or credit union and that it is FDIC insured. Your money will therefore be protected up to limits in the event of a bankruptcy or another failure.
This means up to $250,000 per owner and depositor, per account in each institution. Those holding joint accounts can be covered for that amount.
Disadvantages Of A Money Market Account
Despite how we have outlined what a money market account is and highlighted how it can help you save or invest, there are some drawbacks to a money market account that you should be aware of. These include:
Fees – While some banks and credit unions do not charge any fees to maintain a money market account, they may still charge fees for withdrawals.
These fees can range from $5 to $15 per transaction, especially if you make over the number of withdrawals you are allowed each month with some banks.
Minimum Deposit – To open a money market account, you typically need to have a certain amount of cash available to start with.
This is because the bank needs to cover itself against losses in case someone tries to steal your money. As such, many people who open a money market account don’t have enough money to fully fund their account.
Maintenance Fee – Banks and credit unions often charge a fee every month to keep your money market account open. This could mean paying $10-$20 a month just to keep your money safe.
No Access to Savings Accounts – Because money market accounts aren’t linked to savings accounts, you cannot take advantage of the tax advantages associated with saving.
Interest Rates – Whilst some money markets can offer good rates for savers, others may offer a rate more similar to the APY of any other standard savings account.
Or, they might make it clear that to qualify for a higher rate, you need to reach a minimum balance, which in some cases, can be quite high.
This could make a money market less appealing if you want to get the best rate on your savings.
Benefits Of A Money Market Account
Although we have gone through the disadvantages and drawbacks of a money market account in this article, there are still some benefits, including:
• You can usually access your money whenever you want. There are sometimes no restrictions on when you can draw down your funds. If you’re worried about losing track of your money, then a money market account is a good option, as there are fewer penalties for withdrawing early.
• Interest rates can still be generally competitive. Most money market accounts offer between 0% and 1%. Some even go as high as 2%.
• Unlike many other investment options, you won’t lose any money if you decide not to invest. You’ll get back what you put into the account.
• It’s easy to transfer money between different accounts. Withdrawing money from one account and transferring it to another is very simple.
• Many money market accounts allow you to set up automatic transfers so you never miss out on interest payments.
How Do I Open A Money Market Account?
To open a money market account, you’ll first need to find a bank or credit union that offers this type of account.
Once you’ve found one, you’ll fill out an application form and provide them with information like your name, address, social security number, and phone number.
They’ll also ask for proof of identity, such as a driver’s license or passport. After that, you’ll complete a few forms and sign them. Finally, you’ll deposit a minimum of usually $100 into your new account.
Final Thoughts
We hope after reading this article you understand a little more about money market accounts and how, although they can benefit you and help you reach your savings goals, they do have some disadvantages that you should be aware of.
Remember, with maintenance fees, minimum deposits, and withdrawal restrictions, opening an account is something you need to think carefully about and only after you have evaluated all your finances.
There are plenty of alternative, low risk investment opportunities out there that can get your money hustling for you. So, with that being said, happy saving!
Financial Disclaimer
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