Money Market Accounts Explained
Summary
TLDRIn 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.
Outlines
💼 Introduction to Money Market Accounts
This paragraph introduces the concept of money market accounts, comparing them to a hybrid of checking and savings accounts. The narrator, Andrew Scheer, explains that money market accounts offer some benefits of both types of accounts, such as earning interest and allowing a limited number of transactions per month. He also mentions that these accounts can be opened at various banks or credit unions and touches on the historical context of money market accounts, which were introduced in 1982 with a minimum balance requirement of $2,500. The paragraph ends with a teaser about the potential benefits of money market accounts over regular savings accounts.
Mindmap
Keywords
💡Money Market Account
💡Checking Account
💡Savings Account
💡Interest
💡Transactions
💡Minimum Balance Requirements
💡Tiered System
💡Online Banks
💡Emergency Fund
💡Liquidity
💡Investing
Highlights
Money market accounts combine features of checking and savings accounts.
They offer a higher interest rate than traditional savings accounts.
Interest rates in money market accounts are based on current money market rates.
Money market accounts have minimum balance requirements, unlike some savings accounts.
Historically, the minimum balance for money market accounts was $2,500.
Some banks offer tiered interest rates based on the balance in the account.
Online banks like Discover and Ally have removed minimum balance requirements.
Money market accounts allow for six transactions per month, similar to savings accounts.
They can be opened at most banks or credit unions, including online institutions.
Money market accounts can be used for emergency funds due to their liquidity.
Interest earned can be a small but steady income from idle funds.
The choice between a savings account and a money market account depends on individual needs.
Wealth is built through financial planning, not just by maximizing interest on savings.
Investing in assets like real estate and index funds is key to building wealth.
Money market accounts should be chosen based on personal financial strategy, not just interest rates.
The video encourages viewers to consider a money market account for their emergency fund.
The host suggests not to focus too much on the interest rate but on overall financial health.
Transcripts
most people know about checking accounts
and savings accounts
but what about money market accounts
[Music]
hello and welcome to practical personal
finance where you get the information
you need
to understand and succeed with money i'm
andrew scheer
and if you're here you're probably
wondering about money market accounts
if that's the case then you're in the
right place i'm about to explain what a
money market account is
how it's different than checking and
savings accounts and why you might want
to consider opening one if you haven't
already
if that's exactly what you came here for
then give this video
a thumbs up and if you're new here hit
that subscribe button too
you're about to learn something new
about money
a money market account is like if a
checking account and a savings account
got married and had a baby
it's a lot like a savings account it
earns a little bit of interest
and is limited to six transactions per
month
but it's also a lot like a checking
account you can use a check
or debit card to conduct those six
transactions
you can open a money market account at
just about any bank or credit union
whether it's brick and mortar or online
only but the reasons for doing so
depend on your particular bank money
market accounts have traditionally
earned a little bit more interest than
traditional savings accounts
that's because the interest rates they
pay are based on the current interest
rates
in actual money markets in the world of
finance
these are the interest rates that come
with short-term loans
so at this point you may be wondering if
money market accounts pay more interest
than what's the point of regular savings
accounts
the answer has to do with minimum
balance requirements
money market accounts first came about
in 1982
and when they did the minimum balance
for these accounts was two thousand
five hundred dollars not everyone keeps
that kind of money in the bank
so if you didn't have two thousand five
hundred dollars you still had your
savings account
with low or no minimum balance required
at many brick and mortar banks and
credit unions minimum balances are still
a thing with money market accounts
and a lot of times you'll see this
tiered system of different interest
rates you can qualify for
based on the amount of cash you keep in
the account the more money you leave in
there
the higher interest rate you get and the
more interest
you earn certain online banks like
discover and ally
have eliminated the minimum balance
requirements but they've also cut the
interest rates to about the same
or maybe a little bit less than their
standard savings accounts
so you wind up with a choice between a
few extra bucks in interest with a
savings account
or the ability to write checks and use a
debit card with a money market account
every financial institution seems to
have a unique set of rules when it comes
to money market accounts
so you'll need to check what the rules
are at yours if you
already use your checking account to
write checks and make debit card
purchases
you might be better off sticking with a
standard savings account
depending on the interest rate i would
suggest taking a look at a money market
account at your bank or credit union
as a place to stash your emergency fund
chances are you'll do a little bit
better on the interest rate especially
when you've got it fully funded
and there's ten or fifteen thousand
dollars in there
that money can chill out and earn five
or ten bucks per month in interest
because it's not in your checking
account you can avoid the temptation to
spend it
and when you've got an emergency on your
hands that money is very liquid
it can be accessed easily with a check a
cash withdrawal
or a transfer to one of your other
accounts
one thing that's important to remember
is you're not going to build
any substantial amount of wealth based
on the bank or type of account you
select
the way you're going to build wealth is
by making a plan for your money
eliminating your debt and investing in
things that go
up in value over time like real estate
and index funds
if you asked a wealthy person how much
interest they earn on their savings
they probably wouldn't even know the
answer it's not even on their radar
so don't spend too much time jumping
between banks or credit unions
trying to score the highest interest
rate for your savings or money market
account
just pick one that works for you and
move on to more important things
do you have a money market account what
do you use it for
let me know in the comments if you're
ready to learn how the wealthy make
their money
click right here to learn about how
compound interest works
and how it's calculated and if you're
not already a ppf subscriber
you can change that by clicking right
here
thank you so much for watching i'm
andrew scheer
and i'll see you next time
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