How do money market accounts work?

A money market account is nothing but a type of savings account that is offered by different financial institutions like banks and credit unions. It is just like a savings bank account, the only difference being that it will pay a much higher potential interest rate compared to a savings account and the minimum balance requirement will also be much higher. It allows only around three or six withdrawals every month. And similar to a checking account, you will be allowed to write checks to withdraw cash through a money market account and make payments.

Traditional bank accounts are insured by the FDIC or federal deposit insurance corporation up to a limit of $100000. The FDIC is a federal government agency that was formed in the early 30’s as result of hundreds of banks going bankrupt and millions of people losing money ending up relying on government hand outs for survival. After that people are now secured against sudden bankruptcy as a result of bank mismanagement or global financial crisis situations. With money market accounts, the insurance is provided by the NCUA or national credit union administration which is also another independent federal agency.

The working of a money market account is as follows. You start by opening the account with a bank or credit union. The bank will pay you the interest that they promised you on that money and they will lend that money to some one else at a slightly higher interest rate.

This difference in interest is the income that is generated by a bank to sustain its operations. Interest on money market accounts are compounded on a daily basis and are paid every month. The interest they pay you will be on the total of the principle plus the interest that you have earned till date. The difference between a savings account and a money market account is that the higher your balance is the higher will be the interest you earn on the money.

Like all savings bank accounts, money market accounts will allow you to make withdrawals but only a certain number of times in a month. You will be charged a fee of around $10 if you make a withdrawal in excess of what the bank allows each month. You will also need to maintain a minimum balance in the account in order to avoid paying a penalty fee of around $5. Before settling for an account, always find out about the fees and minimum balance criteria. Also lastly but most importantly, make sure that you are getting an assured interest rate that is way more than a regular savings bank account.