A money market account is a savings account offered by banks that normally earns a higher rate of interest than a normal savings account. These accounts go by the acronym MMA, but also are referred to as Money Market Demand Accounts (MMDA) or Money Market Deposit Accounts (also MMDA.)

It pays a higher rate in part because you have limited access to these funds. You are generally limited to six transfers or withdrawals per month with no more than three transactions as checks written against the account. Banks are required to discourage customers from exceeding these limits, either by imposing high fees on customers who do so, or by closing their accounts. Significant fees can accrue if you have additional transactions.

Money market accounts also have a minimum balance requirement. Some banks require at least $500; others require a much higher balance. Typically, the higher the minimum balance, the higher the interest rate.

In theory these restrictions allow the bank to invest the money with more discretion, allowing a higher return.

The mid-2007 average rate of return on a basic money market account is 2.16 percent, compared to 0.49 percent on a passbook savings account and 0.48 percent on a statement savings account. These numbers are for comparison purposes only. Check current rates at the time you wish to open an account.

Like other savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation. These accounts are usually managed by banks or brokerages, and can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments, and while they pay more than a traditional savings account they offer a lower interest rate than many other investments.

For money that you plan to hold for a short period (three months to a year) and that needs to be liquid, a money market account is a good place to put it.

Because MMAs vary from one another significantly in the details, here are a number of things to look for when choosing a money market account.

  • What is the minimum opening deposit?
  • Is this also the minimum balance below which you cannot deop.
  • What interest rate does the account pay?
  • Are there higher yields for bigger balances?
  • Do I earn higher yields on the entire balance or only part of it?
  • Is there a monthly maintenance fee?
  • Under what conditions can fees be avoided?
  • What is the fee if my balance drops below the required minimum?
  • Will the bank waive fees if I have other accounts with them?
  • Is there an extra fee if I close out my account early?
  • What’s the fee for writing more than three checks a month on the account?
  • What’s the fee for using automated teller machines?
  • Is there more than one version of a money market account? If so, what are the differences?

Investors are sometimes confused about the difference between a Money Market Account and a Money Market Fund. While the names are similar these are very different types of investments.

A money market fund is a mutual fund that carries no FDIC insurance and is a collection of short-term debt. Money market investments are comprised of various financial debt instruments with maturities of 13 months or less. The SEC requires the average maturity of investments in a money market fund to be less than 90 days, which limits risk in these funds.

When you own shares in a mutual fund you own fractional interest in the investments held by the mutual fund. The value of a share of a money market fund is generally always $1.00. However, this price is not guaranteed. The investments that in the mutual fund that comprises the value may very well drop in value under extreme conditions. In a money market fund investment it is the interest rate that will normally fluctuates, not the share price.

Money market funds are classified by the type of debt they purchase. Government money funds invest in U.S. government and agency securities. Some government money funds are Treasury-only funds while others buy a full range of government and agency securities.

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