With a variety of unique investment opportunities available to everybody, knowing how to proceed can be challenging. After all, the right investment strategy for one person may not be ideal for somebody else. A number of factors can affect which investment options are the best choice for a particular individual: knowing how much to invest, how much risk to take on and how long the investment can take to pay off ultimately affect each and every outcome.
Money market accounts have increasingly become a popular investment strategy, but many people still do not understand how they work. We’ll take a closer look at this investment option and help you understand the basics of these accounts.
What Is a Money Market Account?
The first question you’re probably asking is what exactly is a money market account. The easiest way to think about it is as a type of savings account. Offered usually by banks and/or credit unions, money market accounts produce higher returns on investment than traditional savings account but also have more restrictions than a standard savings account.
Depending on the exact selection, a money market account can pay anywhere from two to four times the interest rate of a traditional savings account (current money market rates are in the ballpark of 1% to 1.5%).
Money market accounts can be easily opened. The reason why money market accounts pay a substantially higher interest rate is because the bank uses these accounts to finance loans to other people.
What Restrictions Exist on Money Market Accounts?
In order for the broader concept of money market accounts to function, there must be some limitations on how the money can be accessed or used.
First of all, money market accounts generally require a minimum deposit in order to be opened. For some institutions, this may be as little as a few hundred dollars; for others, you may need to contribute $3,000 or more. Additionally, maintaining that minimum balance is necessary to enjoy the higher interest rate.
Much like traditional savings accounts, you may access your money whenever needed. However, there are often restrictions on how many withdrawals can be conducted in a given month. Since the bank is lending your money out in effect to other account holders, such restrictions are necessary to guarantee the assets of all depositors.
Other Money Market Account Facts
Money market accounts, just like traditional savings accounts, are backed via FDIC insurance and all of your investment (up to $250,000 per account) is guaranteed in the event of a financial crash or trouble relating to the bank/institution with which you’ve invested.
In addition to any restrictions on account use set by the local bank or credit union, the Federal Reserve also has a set monthly maximum in terms of withdrawals from a MMA (6 withdrawals). However, most financial institutions set their own restrictions below this number.
Trillions of dollars are currently being held in money market accounts, with their overall popularity soaring during the recent global financial crisis. This has led to a more competitive environment between financial institutions, and has actually lowered interest rates compared to long-term averages.
All in all, money market accounts are a great, low-risk investment strategy that can help mitigate any additional risk in your broader investment strategy. As long as you manage your finances wisely and continue to contribute to the MMA, you can expect reliable and meaningful growth from year to year.
