How Money Market Accounts Work

In today’s budget-conscious era, a large number of consumers are taking a closer look at their finances and trying to discover ways to get the most out of their income and any savings that they have. The overall feeling of economic uncertainty has also caused many to become wary of the inherent risks that they face when investing in stocks, bonds or mutual funds. However, those people with available capital are usually not satisfied with the minimal income provided by the low interest rates offered with traditional savings accounts. As a result, money market accounts have become an increasingly popular, secure means for consumers to stretch their cash assets. Like a traditional savings account, a money market account is a federally-insured deposit account offered to customers by most banks and credit unions; banks are insured by the FDIC, and credit unions by the NCUA. This provides the account holder with security in knowing that any funds deposited into a money market account are guaranteed not to be lost.

Besides being low-risk, money market accounts have the advantage of paying a substantially higher interest rate than the rate offered by a traditional savings account. The bank or credit union uses the funds that are deposited into its money market accounts to make short-term loans to other banks, corporations and financial institutions on the global market. Interest on money market accounts is compounded daily and dividends are paid monthly. In other words, every day the bank will pay interest on the total amount deposited in the money market account. This interest will then be added to the total, and on the following day, interest will be paid again on the increased amount. At the end of the month, the full amount of interest that has compounded becomes available as cash in the account.

Another benefit provided by a money market account is that it allows greater flexibility for instances when the customer wishes to access the funds. An account holder can withdraw cash on short notice with little or no penalty, depending on the amount that is requested for withdraw. Additionally, money market accounts are structured to allow a limited number of checks to be written in a given time period. The number of checks available and allotted time periods will vary depending on the rules set by a specific financial institution. Furthermore, the account holder can deposit funds into a money market account as frequently or infrequently as desired.

While an individual will never realize the amount of profit that can be made relatively quickly by investing in the stock market, the security and flexibility provided by money market accounts are ideal for those with long-term investment goals.

This entry was posted in Financial Tips and tagged . Bookmark the permalink.

Comments are closed.

Find High Yield Online Savings Accounts from Banks You Can Trust

Savings account interest rates updated daily.