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.

Outlines

00:00

💼 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.

Keywords

💡Money Market Account

A money market account is a type of financial product offered by banks and credit unions that combines features of both checking and savings accounts. It typically offers higher interest rates than a regular savings account and allows limited transactions, including check writing and debit card usage. In the video, the presenter likens it to a hybrid of a checking and savings account, emphasizing its role as a financial tool that can earn slightly more interest than a savings account while still providing some liquidity.

💡Checking Account

A checking account is a type of bank account that allows depositors to write checks and withdraw money, as well as make transactions using debit cards. It is designed for day-to-day transactions and typically does not earn interest. The video script mentions checking accounts as a point of comparison to money market accounts, highlighting the differences in interest earning potential and transaction limitations.

💡Savings Account

A savings account is a financial instrument offered by banks and credit unions where money is deposited and saved, usually earning interest over time. It is designed for long-term savings and typically has limitations on the number of transactions that can be made per month. The video script contrasts savings accounts with money market accounts, noting that the latter may offer higher interest rates but also come with minimum balance requirements.

💡Interest

Interest is the fee paid by borrowers to lenders, expressed as a percentage of the principal, calculated over a period of time. In the context of the video, interest is the earnings that accrue on money deposited in accounts like money market accounts and savings accounts. The presenter explains that money market accounts traditionally offer higher interest rates than savings accounts, making them potentially more lucrative for savers.

💡Transactions

In the context of banking, transactions refer to the activities or operations that involve the transfer of money, such as deposits, withdrawals, and payments. The video script specifies that money market accounts are limited to six transactions per month, which is a regulatory requirement that differentiates them from checking accounts, where transactions are typically unlimited.

💡Minimum Balance Requirements

Minimum balance requirements are the lowest amounts that must be maintained in an account to avoid fees or penalties. The video script discusses how money market accounts often have minimum balance requirements, which can be a barrier for some individuals. It contrasts this with the more accessible nature of savings accounts, which may have lower or no minimum balance requirements.

💡Tiered System

A tiered system in banking refers to a structure where different levels of service or benefits are offered based on the amount of money a customer maintains in an account. The video script mentions that money market accounts often operate on a tiered system, where higher balances can qualify for higher interest rates, incentivizing customers to keep more money in the account.

💡Online Banks

Online banks are financial institutions that operate primarily through the internet, offering banking services without the need for physical branches. The video script references online banks like Discover and Ally, which have eliminated minimum balance requirements for money market accounts but have also reduced the interest rates to levels comparable to standard savings accounts.

💡Emergency Fund

An emergency fund is a reserve of cash set aside to cover unexpected expenses or financial hardships. The presenter in the video suggests that a money market account could be a suitable place to store an emergency fund due to the potential for higher interest earnings compared to a checking account, while still maintaining liquidity.

💡Liquidity

Liquidity refers to the ease with which an asset can be converted into cash without a significant loss in value. In the context of the video, liquidity is mentioned as a key feature of money market accounts, allowing for easy access to funds through checks, cash withdrawals, or transfers, which is important for emergency situations.

💡Investing

Investing is the act of allocating resources, such as money, with the expectation of generating an income or profit. The video script briefly touches on investing as a means of building wealth, suggesting that while money market accounts can be part of a financial strategy, more significant wealth accumulation comes from investing in assets like real estate and index funds.

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