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What is a Money Market Account and How to Choose the Best with High Yield Rates

By David Bakke

bigger piggy banks savingsThe earlier you begin investing, the better your payoff will be, so begin investing as soon as you can afford to do so.

An important piece of advice along these lines is to “pay yourself first, and then invest.” If you contribute, even in small amounts, to a smart savings or investment plan, you’ll see the results add up quickly.

If you’re mired in debt, do your best to get out of debt before worrying about investing. But once you’ve paid off all of your loans, start investing some of your monthly income to build for your future.

A simple and effective plan for investing, especially for beginners, is opening a money market account.

What Are Money Market Accounts?

While I’d classify myself as an “intermediate” player in the world of investing, we all have to start somewhere. When I first began investing, one of the first vehicles that I took advantage of after getting out of debt was a money market account. A money market account is just one of the many types of savings accounts that most banks and credit unions offer, so what should you consider in choosing it over one of the other options?

Features & Advantages

  1. Higher interest rates - Money market accounts usually provide better monthly returns than basic checking or savings accounts.
  2. Check-writing and withdrawal - You’ll have more access to your money than you would in a CD or other long-term investment.

Limitations & Disadvantages

  1. Higher minimums - Money market accounts obligate you to commit more cash to your account, usually a minimum balance of $1,000, sometimes more.
  2. Withdrawal limits - You’ll face a regular limit on transactions per month, and usually a maximum dollar amount for withdrawals too.

Basically, you’ll get an above-average return without a lot of obligation, but you won’t have complete flexibility. Keep in mind that a money market account is different from a money market fund, which is a type of mutual fund that has its own set of requirements and restrictions.

Is It Right For You?

A money market account is great way for you to start out on the path of investing, especially if you don’t know much about the ins and outs yet. Yes, your money is invested, but you are not the one managing the day-to-day moves. The banks do that for you.

Though the return on your money won’t be as high as it would be if you were investing on your own, the account can be your introduction to the game of investing. It’s a safe and secure investment vehicle. Money market accounts also pay you monthly dividends, with compound interest. That means the interest that you earn is automatically reinvested in your account, allowing you to earn interest on your interest!

Where Is Your Money Invested?

Your bank will invest your money in short-term debt obligations. This plan maximizes the safety of your money but still provides a decent return. These short-term debt obligations are usually from highly rated companies and government agencies.

Did you catch all of that? Well, the bottom line is: A money market account is one of the safest routes for investing your money. You’re not going to retire on the interest you earn, but it’s a perfect “starter” account to get you moving until you become more investment savvy.

Choosing the Right One

Now that you understand exactly what a money market account is, how do you pick the right one? Consider the five core aspects of a how a money market can fit your needs.

1. Know Your Risk
Money market accounts are generally safe and conservative, but some have slightly riskier investment options than others. Be sure to choose one that is within your comfort zone.

2. Check Your Minimum
Choose an account with a minimum balance requirement within your means. Going broke just to start a money market isn’t a good idea. Also, keep in mind that dipping below the minimum means penalties will apply.

3. Watch For Withdrawals
Pick a fund that allows withdrawal privileges that work for you. If you’re investing money that you know you’ll never need, then you don’t have to worry about withdrawal limitations. But if you know you’ll need some access to your money, make sure the withdrawal features look good to you.

4. Don’t Forget About Fees
All money market accounts come with some bank fees and charges. Make sure you read the fine print and understand monthly and annual fees, as well as penalties, before deciding on an account. Some fees are the same across the board, but some charges vary by account.

5. Go Interest Shopping
Although you shouldn’t expect too much of a difference in interest rates from bank to bank, the percentages can vary. Shop for the best rate. Because some online banks have lower internal costs, they can offer higher interest rates.

Two great money market account options you might want to look into are EverBank and Ally Bank.

Final Word

In short, a money market account is a great place to begin investing and start on the road to financial success. Until you gain more experience in the world of investing, it’s a safe and secure way to get your money working for you. The best piece of advice to consider as you begin your search is to seek out an account that combines the highest rate of return with the lowest minimum balance requirement.

Have you found great rates, low fees, or other money market account victories? Share your success stories in the comments below.

(photo credit: Shutterstock)

David Bakke
David started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called "Don't Be A Mule..." Since then he has been a regular contributor for Money Crashers. He lives just outside Atlanta, GA and most all of his free time is taken up by his amazing three year old son, Nicholas.

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  • http://www.engineer-a-business.com Kalen

    Great post Dave! I have never had a money market account but I think I will try to get one at some point I just have to have enough to put down for it.

    • http://www.moneycrashers.com David/moneycrashers

      Kalen

      Thanks for your kind words and I wish you luck

      I think its a great way to start!

  • Kalen Smith

    Awesome piece on money market accounts and the key things to look for when choosing one…there are just so many darn options these days!

    • http://www.moneycrashers.com David Bakke

      Kalen

      Thanks for your kind words and I wish you luck

      I think its a great way to start!

  • http://bill-wellins.snappages.com/international-money-transfers.htm Steven Lupton

    I have a money market account, which I have been using to stash some money for a major home remodeling project. At my credit union, the interest rate depends on how much money you have in the account–it’s more for over $25,000. When I actually got the work done, I did hit the withdrawal limit and had to cover the last check out of my savings account–fortunately, that wasn’t one of the really big ones.

    • Davidbakke

      Cool story! Thanks for sharing…

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