What are Money Market Accounts (MMAs)?

A money market account (MMA) is a hybrid savings account that pays you higher than normal interest and allows a low maximum number of transactions per month.

Money market accounts (MMAs) are often quite popular savings vehicle with people who have more than prescribed minimum balances needed to have an account (typically from $1,000 to $2,500), process only a few transactions per month (usually limited to from three to six), and don't need to write more than three checks per month.

Your ability to write a few checks every month serves to make an MMA even more versatile, while remaining more profitable than a regular savings account. The transaction restrictions help your bank or credit union manage your money to provide you with higher earnings.

Do not confuse MMAs with money market mutual funds. MMAs are accounts at insured banks and credit unions, so your principal is protected up to the amount allowed by the FDIC - currently $250,000 per depositor (see also: Recent FDIC changes. Money market mutual funds carry no insurance from the FDIC (banks) or NCUA (credit unions). They are merely a collection of short-term (13 months or less) securities held by a mutual fund that pay you interest.

How to compare components of MMAs

Money market account offerings differ in terms from institution to institution. Yet all true MMAs have the transaction restrictions noted above. These are regulations issued by the Federal Reserve primarily to protect their institutions from funding instability.

To compare different MMAs, examine the following:

• Interest rates – How much is the institution paying and how is the interest calculated and posted?
  
  
• Minimum investment – Depending on your personal budgetary freedom or restriction, the minimum needed to open a money market account may be very important.
  
  
• Check writing ability – Are you allowed to write up to three checks per month? More than that? Less than that? Do you need this ability or might you sacrifice this feature to earn a bit more interest on this savings account?
  
  
• Institution financial stability – Are the financial institutions offering MMAs that you like in a safe and stable financial condition? While your account is insured, this protection extends to principal only; your interest earnings are not guaranteed in a bank financial problem. You'll feel more comfortable with a stable institution (for all your accounts, not just MMAs).
  
  
• Money market mutual funds comparison – You might want to compare MMAs with one or more money market mutual fund offerings (understanding that these accounts are not federally insured) to learn of any earnings and terms differences. But keep in mind the added risk involved in placing your money in these types of funds.

By comparing the components of a variety of MMAs, you'll learn the types and terms of money market accounts that appeal to you. While this type of savings account may not be for everyone, if you have available funds that you can invest to earn higher rates of interest than with other accounts, a money market account may be just right for you.

Typical MMA options

Once again, most of the terms of MMAs are specified by the Federal Reserve and will be identical at banks and credit unions. Institution-determined options typically involve the level of the minimum deposit, links to your regular or business checking accounts, and the way your interest is posted and/or paid.

For example, your bank or credit union may have a variety of MMA accounts. Minimum deposit accounts of $1,000, $2,500, and $5,000 may carry different interest rates with the higher minimum investment MMAs paying more than lower investment level account.

Another option often available is a direct link to your checking account. You can use your money market account to act as overdraft protection without paying fees or interest on unsecured overdraft loans. Since you are allowed three to six transactions per month, should you need this protection, your MMA can provide it if you have this option.

You may be given a choice of leaving your interest in the bank or credit union, which will continue to increase your account balance or receiving your earnings monthly or quarterly. Your institution may offer to transfer your earnings to another account of your choice.

Unless you need these earnings on a regular basis, your best option is often to leave your interest on deposit to enjoy the "compounding" factor. You will begin to earn interest upon interest as your account increases and time passes.

MMAs are a viable savings option

As you can see, a money market account is a higher earning form of savings account that also offers you some flexibility in making withdrawals and deposits each month. While it cannot be used as a pure "transaction" account (like a checking account), you have the option to access the MMA, unlike a certificate of deposit, which is a contract for a specified period.

See also: Compare money market rates