Money market account

Definition

A money market account is a type of savings account that typically offers higher interest rates than traditional savings accounts, while also providing limited check-writing and debit card access. This account combines features of both savings and checking accounts, making it an attractive option for those who want to earn interest on their savings while maintaining some level of liquidity. Money market accounts are often offered by banks and credit unions, requiring a higher minimum balance compared to regular savings accounts.

5 Must Know Facts For Your Next Test

1. Money market accounts usually require a higher minimum deposit than regular savings accounts, often ranging from $1,000 to $10,000.
2. The interest rates on money market accounts are typically variable, meaning they can change over time based on market conditions.
3. These accounts may offer limited transaction capabilities, allowing a certain number of withdrawals or transfers per month, often capped at six.
4. Money market accounts are considered low-risk investments since they are generally insured by the FDIC (for banks) or NCUA (for credit unions), up to the legal limits.
5. Some money market accounts may come with checks or debit cards, providing easier access to funds compared to traditional savings accounts.

Review Questions

• How do the features of a money market account differ from those of a traditional savings account?
  • Money market accounts differ from traditional savings accounts primarily in terms of interest rates and access to funds. Money market accounts generally offer higher interest rates and allow for limited check-writing and debit card access, while traditional savings accounts have lower rates and no such features. Additionally, money market accounts often require higher minimum deposits and have restrictions on the number of transactions allowed per month.
• Evaluate the benefits and drawbacks of using a money market account as a method of saving.
  • The benefits of using a money market account include higher interest rates compared to traditional savings accounts, limited check-writing capabilities, and the safety provided by FDIC or NCUA insurance. However, drawbacks include the requirement for higher minimum balances, potential fees if the balance falls below that threshold, and limitations on monthly transactions. These factors make it essential for savers to weigh their individual needs against the characteristics of money market accounts.
• Assess how economic conditions might influence the appeal of money market accounts for savers in different scenarios.
  • Economic conditions play a significant role in determining the appeal of money market accounts. During periods of low-interest rates, savers may find money market accounts less attractive as returns on savings could be minimal compared to other investment options. Conversely, in times of rising interest rates, these accounts become more appealing as they typically offer better yields than standard savings accounts. Additionally, in unstable economic climates, people might favor money market accounts due to their safety and liquidity features while still wanting to earn interest on their funds.

Related terms

interest rate: The percentage at which interest is paid by borrowers for the use of money that they borrow from a lender.

liquidity: The ease with which an asset can be converted into cash without affecting its market price.

savings account: A deposit account held at a financial institution that provides a modest interest rate and easy access to funds.