Money Market Accounts Explained

Summary

In this episode of Practical Personal Finance, Andrew Scheer explores money market accounts, comparing them to a hybrid of checking and savings accounts. Money market accounts offer slightly higher interest rates, akin to savings accounts, but with the added benefit of check-writing and debit card usage, similar to checking accounts. They often require a minimum balance, which can limit their accessibility. Andrew suggests considering a money market account for an emergency fund due to potentially higher interest earnings. He emphasizes that building wealth is more about financial planning and investing in appreciating assets rather than chasing the highest interest rates from banks.

Takeaways

• 💼 A money market account is a hybrid financial product that combines features of both checking and savings accounts.
• 🏦 These accounts typically offer higher interest rates than traditional savings accounts, aligned with current money market rates.
• 🚫 Money market accounts are limited to six transactions per month, similar to savings accounts.
• 💳 They provide the convenience of a checking account, allowing check writing and debit card transactions.
• 💰 Historically, money market accounts required a minimum balance, often $2,500, to open and maintain.
• 📈 Some online banks have removed minimum balance requirements but may offer lower interest rates compared to traditional money market accounts.
• 🔍 The interest rates for money market accounts can be tiered, with higher rates for larger balances.
• 💡 Money market accounts can be a good place to store an emergency fund due to their higher interest rates and liquidity.
• 🏡 Building wealth is not primarily through savings or money market accounts but through strategic financial planning, debt elimination, and investments.
• 👀 Wealthy individuals often do not focus on the interest earned from savings accounts, as their wealth is built through other investment vehicles.

Q & A

What is a money market account?

A money market account is a type of financial product that combines features of both checking and savings accounts. It earns interest, similar to a savings account, and allows limited transactions, typically six per month, using checks or a debit card, like a checking account.

How do money market accounts differ from traditional savings accounts?

Money market accounts typically offer higher interest rates than traditional savings accounts because they are based on current interest rates in the money markets, which are tied to short-term loans. However, they often come with minimum balance requirements.

What are the minimum balance requirements for money market accounts?

When money market accounts were introduced in 1982, the minimum balance was $2,500. Today, many banks and credit unions still enforce minimum balances, often with tiered interest rates that increase with higher balances. However, some online banks have eliminated these requirements.

Why might someone choose a money market account over a savings account?

One might choose a money market account for the potential to earn higher interest rates, especially with a higher balance, and for the convenience of being able to write checks or use a debit card for transactions.

What is the typical transaction limit for money market accounts?

Money market accounts are limited to six transactions per month, which aligns with regulations to maintain their status as savings-like accounts.

Can you open a money market account at any bank?

Yes, money market accounts can be opened at most banks and credit unions, both brick and mortar and online institutions.

How can a money market account be beneficial for an emergency fund?

A money market account can be a good place for an emergency fund because it earns interest and provides easy access to funds through checks, cash withdrawals, or transfers, while keeping the money separate from a checking account to avoid spending it.

What is the importance of interest rates in the context of money market accounts?

Interest rates are important because they determine the amount of interest earned on the balance in the account. Higher rates can make money market accounts more attractive for those looking to grow their savings.

How do online banks differentiate their money market accounts?

Some online banks have done away with minimum balance requirements but have also reduced interest rates to levels comparable to or slightly lower than their standard savings accounts.

What is the main takeaway regarding building wealth according to the video?

The main takeaway is that building wealth is not primarily about the interest earned on savings or the type of account, but rather about having a financial plan, reducing debt, and investing in assets that appreciate over time, such as real estate and index funds.

What advice does the video give for those who are constantly seeking the highest interest rates for their savings?

The video advises against spending too much time chasing the highest interest rates and suggests that once a suitable account is found, one should focus on more important financial goals.