|Money Market Accounts and Interest Rates|
A money market account is a hybrid of a savings account and checking account. It allows you to earn a higher interest rate on the funds in your account than most traditional passbook or statement savings accounts and checking accounts.
Money market accounts usually require that you maintain a higher minimum balance and limit the number of monthly transactions you can make without incurring a fee. Unlike a certificate of deposit, a bank money market account allows you to access your funds, so you can withdraw them without penalty in case of emergency, etc. Just remember that there's a legal limit to the number of transactions allowed.
How are money market account interest rates determined?
Money market accounts provide the global financial world with short-term liquid funding. Essentially, here's how they work:
You loan your money to the bank by opening a money market account. You earn a specified amount of money on your funds based on your money market interest rate.
The bank loans out your funds at a slightly higher interest rate so that it can pay you interest and make a bit of profit.
That means the interest rate for your money market account is influenced by the amount of money the bank believes it can earn when it loans out the funds in your money market account. Since the funds are liquid and can be withdrawn at any time, the financial industry views money market accounts as less stable and therefore riskier than a guaranteed investment, like a bank CD. Interest rates are calculated accordingly.
To find the best money market rate, you'll need to understand how bank money market account interest rates are determined. The next step is to determine the maximum time and amount you are willing to invest, and then begin examining current money market rates.
Should you invest in a money market account or a certificate of deposit?
Sometimes deciding between a money market account and bank CD can be difficult. Money market rates, as well as CD interest rates, are important, but they aren't the only factors you should consider.
First you need to decide the maximum amount of money that you are willing to deposit — and the maximum length of time you leave it on deposit. If there is a chance you will need to withdraw funds, a certificate of deposit is probably not a wise choice. You may discover it would have been smarter to invest in a money market account, even at a slightly lower interest rate, due to penalties incurred when you have to make an early withdrawal from a bank CD. Read more about money market accounts to determine if one is right for you.