Question: Money Market Account is liquid. What does it mean?

One of the ways to understand the basics of money market account is to understand the terms associated with it. The term “liquid” is used to define MMA. According to the Financial & Investment Dictionary, a liquid asset is “cash or easily convertible into cash” such as “cash, marketable securities and accounts receivable”. A very crude example of a liquid asset is the dollar bills a person has in his pocket. 

MMA is just one type of a liquid asset. Checking accounts, Certificates of Deposits, Mutual Fund Shares, Time deposits, Savings account, Stocks, US Bonds, and Treasury Bills also belong in this category. An asset such as cars, real estate or jewelry is not liquid because it takes time for them to be sold and converted into cash.

A liquid asset may have the following characteristics: 

• It can be converted into cash within twenty days.It is a negotiable asset convertible to cash quickly to be used for funding purposes.
• The maturity date is usually is usually for one year.
• The price is stable for cash investment because it does not fluctuate.
• It can be sold easily and there is a nominal loss of value.  

The most compelling reason why MMA is liquid is that the depositor can withdraw anytime through a teller, ATM, or even through mail for free especially if you need it during emergencies. However, it should be noted that there is a restriction for transfers. According to a federal regulation, people with MMA can only make six transfers monthly or otherwise, the depositor will be charged with a fee. 

Many people want to keep their money in a MMA because of high interest rate. Keeping your money in this type of account has some advantages. Aside from the high interest rate, the amount of the interest from the principal amount is compounded and credited monthly in the account. The interest also earns an interest which means a higher investment return. 

Another advantage is that, you are keeping your liquid asset in a safe place because MMA is FDIC insured up to $250,000. 

MMA is viewed as an investment which brings restrictions to the depositor. Even though withdrawals can be made, a minimum maintaining balance is required. A failure to meet the required balance comes with a price. A depositor will be charged with a maintaining fee or some banks will move the account into a non-interest yielding account.