Remember piggy banks as a kid? Many children had them growing up. Whether to save up for that really cool video game or for those rollerblades that couldn’t wait until Christmas, piggy banks were a great childhood lesson in money management and financial literacy. And if you had the classic version, the clay piggy without the hole in the bottom, you knew that the only way to retrieve your money was to break the bank, literally.
Piggy banks were also useful in teaching about saving: every so often you could add spare change you may have found in the laundry or on the sidewalk while additional money was earned over time from birthdays, doing chores, or from the “tooth fairy.” So, once you finally opened your piggy bank, you discovered there was a lot more money in it than when you started.
Even as an adult, seeing savings grow beyond what was initially deposited is just as enticing. But wouldn’t it be better if your money could grow even faster? Thankfully, many banks offer this through an alternative to savings and checking accounts: a money market account.
More than a Savings Account
Banks do not allow savings account transactions through debit card purchases. This, of course, would defeat the purpose of having a separate account for “savings.” The only way to physically withdraw money from your savings account is through an ATM or inside a bank branch. But what if you set aside money to pay for an important bill? You’re goal is to keep it separate from checking to refrain from spending it, yet stored in a bank account with security. As an ordinary savings account, you’d need to perform additional steps such as a withdrawal or an account transfer before making the payment.
A money market account, on the other hand, is a hybrid of a savings and checking account. It’s enables payment transactions through debit cards and checks, yet also is designed to help you save money set aside from your checking account. The money market account goes a step beyond a savings account with its accessibility. If you’d like to pay a bill using the money stored in your money market account, you have the convenience of doing so at the swipe of a card.
Not Your Average Checking Account
Like a checking account, money market accounts are liquid, meaning easily accessible. You can withdraw funds on a debit card or from an ATM just as with any other checking account. The advantage of a money market account is its ability to earn a higher rate of interest on the balance. It’s like having two checking accounts, one that’s used for everyday purchases and bill payments, and the other that functions as a high interest savings account that can still be easily tapped for special purchases.
Also, like the checking account, the money market account is insured, either by the FDIC if within a bank or by the NCUA if issued by a credit union. Best of all, money market accounts generally have higher interest rates than savings accounts, which brings us to our next topic.
How to Maximize Money in Your Money Market Account
Now that you know the best of both worlds is available, it’s important to take advantage of it. Most people open a savings account with their checking account because the average bank offers them as a package deal, such rollover savings. However, aside from storing your extra cash, savings accounts do not have much else to offer.
Since money market accounts generally earn higher interest than a savings account, you can take advantage of it. Higher yields mean that your savings will grow faster, bringing you to your savings goal sooner. Consider important money you’d set aside in a separate account, such as an emergency fund or for college tuition. Using an interest calculator, you can determine how much money you would earn by depositing money in a money market account compared to keeping it in a savings account.
In the example below, we used the Compound Interest Calculator from investor.gov with a 1.85% Annual Percentage Yield (APY) offered by CIT Bank to demonstrate how much money you can earn while saving. Without making monthly contributions, here is an estimate of what you’ll earn after one year:
Maintaining that ‘piggy bank’ mindset, imagine if you commit to depositing a small percentage of your paycheck to the money market account each month, in addition to the earned interest. Let’s say you receive your paycheck bi-monthly and can set aside about $50 per paycheck, which is approximately $100 a month:
As shown in the calculator above, instead of only the $1,200 you’ll contribute over the year, you also earn about $103 in dividends as opposed to the $93 without contributions.
Best Way to Use Your Money Market Account
Before opening any type of bank account, it’s essential to analyze your individual needs and goals. Depending on the stage of life or circumstance, your reasons for opening a money market account may differ. Analyze how the benefits of a money market account align with your specific financial needs.
Young college students, for example, are generally financially dependent on student loans for living expenses and may have low credit card limit. In their case, it’s important to have an emergency savings in case they encounter an expense that their credit card or student loans can’t cover. A money market account is the best option for a student who needs a safe place to store extra money, since it’s secured and protected with FDIC insurance. If an emergency arises, such as a car issue or unexpected bill, college students can easily withdraw from their account using a debit card or by writing a check.
Parents or people more established in their income, on the other hand, may be looking into spreading their finances across several accounts. A money market account is a great option for short-term goals, such as a setting aside a vacation fund or as an additional account designated for occasional bill payments.
Keep in mind that money market accounts also have the six-withdrawals per month rule like savings accounts, so it’s important to keep track of your transactions. Also, many financial institutions have a high minimum deposit–some as much as $10,000–to open a money market account, as well as maintaining a certain minimum balance.
Thankfully, we’ve done the homework for you. Our list of Top 10 Money Market Accounts is composed of several bank institutions all with different requirements, including those permitting low minimum balances for initial deposits. If you’re interested in taking your money a step beyond a basic savings account, take advantage of a money market account and watch your savings grow.