Over the years, money market accounts have increasingly become popular among most individuals. More people now understand the benefits offered by these interest-bearing accounts.
But what is a money market account?
- 1 What money market means
- 2 Further understanding of the money market account
- 3 Types of money market instruments
- 3.1 Treasury Bills:
- 3.2 Certificate of Deposits (CD’s):
- 3.3 Call and Notice Money:
- 3.4 Inter-bank Term Market:
- 3.5 Promissory Note:
- 3.6 Commercial Papers:
- 3.7 Bills of exchange:
- 3.8 Banker’s Acceptance:
- 3.9 Repurchase Agreements:
- 3.10 Drawbacks of Money Market Accounts
- 3.11 Advantages of money market accounts
Typically, a money market account refers to an account in a bank/credit union that bears interest.
More often than not, this account offers less flexibility than a standard account and is useful for calculating one’s net worth.
Note that money market accounts are different from mutual funds and bonds market. They have high interest rates and debit card advantages.
What money market means
The term money market refers to a part of the financial market where people trade short-term maturities and financial instruments.
Some of these financial instruments include commercial papers, promissory notes, and treasury bills.
Here, individuals/institutions borrow and lend funds for a short period. The money market carries several financial risks. Thus, all participants should understand how the money market works before trading.
Further understanding of the money market account
Opening a money market account requires you to deposit a certain amount of money first. The terms and conditions of these accounts often vary depending on your banking institution.
Your account balance should not go below a certain amount; otherwise, you would receive a monthly penalty. If you wish to open a money market account, visit your local bank or credit union.
They will take you through the whole process of opening the account. But first, they’ll take time to address all your questions. It would be best to understand the benefits and drawbacks of a money market account before opening one.
Unlike money market mutual funds, a money market account offers federal insurance protection. The Federal Deposit Insurance Corporation (FDIC) safeguards various accounts like the money market by $250,000 per account.
If you wish to obtain more than $250,000 insurance, consider opening another MMA account in a credit union or a different bank. Money market accounts in credit unions are often insured by the National Credit Union Administration (NCUA).
The amount provided is the same, $250,000 for one account and $500,000 for a joint account. This is one of the advantages of a money market account. Before opening one, understand all benefits and drawbacks of this account.
Types of money market instruments
Below are the types of money market instruments
The Central Government is responsible for giving out treasury bills at lower prices. Most people are familiar with treasury bills since they incorporate low financial risk.
As a result, they are a popular, safe option among most individuals. The returns of this financial instrument are appealing.
Additionally, they mature within different time schedules. Some mature within a year while others within three months or six months.
Certificate of Deposits (CD’s):
Certificate of deposits are also money market instruments that act as deposits made by banks or financial deposits. CDs are relatively different from fixed deposits.
Unlike fixed deposits, you can only make a certificate of deposit when dealing with huge amounts of money. Moreover, these deposits are negotiable.
They are less risky and incorporate high interest rates. Their maturity period ranges from a week to a year. Anyone can obtain this financial instrument as long as they are past the legal adult age.
Call and Notice Money:
Another money market account instrument is the call and notice money. In the notice market, once you borrow funds, you are given a payment period of two weeks.
On the flips side, funds borrowed in the call money market need to be paid in 24 hours. You don’t need to use any of your assets as collateral for the funds borrowed.
In most instances, cooperative and commercial banks are active in this market; they lend and borrow from this market. But other financial organizations act as lenders in this market.
Inter-bank Term Market:
Unlike the call and notice money, the inter-bank term market offers a payment period of more than fourteen days.
Again, commercial and cooperative banks can borrow and lend money in this market. You don’t need to secure the funds borrowed using your assets. Nonetheless, you need to pay the funds before 90 days are over.
One of the most common money market instruments is a promissory note. A promissory note is more of a written agreement between two parties.
One party is usually required to pay a specific amount of money within a defined period. More often than not, the payment period is three months. This financial instrument is useful in the early stages of opening the account.
This money market instrument is more of a promissory note that does not have security. Commercial papers are issued mainly by top-notch companies.
Their maturity period ranges from 1 to 270 days and gets traded in the secondary market. Commercial papers also provide more returns than treasury bills.
Bills of exchange:
The commercial bill or bill of exchange is also a written financial instrument discounted by the creditor. Payment is usually due after a certain period.
The banker’s acceptance is often a legal document containing all payment information. It indicates when you need to make payment, how much you need to pay, and your personal details.
Commercial banks are usually responsible for issuing out a banker’s acceptance. The maturity period of this financial instrument ranges from 30 days to 180 days.
As the name suggests, this financial instrument incorporates a payment agreement between a buyer and a seller.
In most instances, the seller issues a short-term loan to the buyer with the primary objective of repurchasing and selling.
Drawbacks of Money Market Accounts
As mentioned earlier, you need to understand all the disadvantages of a money market account before opening one.
Occasionally, you may end up realizing that other account types would work better for you. Let’s take a look at some of the downsides of a money market account.
- Minimum balance requirements
In a money market account, you have to have a certain amount of money in your account at all times.
This can be an inconvenience, especially during tough economic times. Almost all banks have this policy, but they require a balance of as little as $1. If you have such an account, you can always manage.
Even so, other banks may need you to have a balance of at least $60,000 or 100,000 when opening the account. Thus, money market accounts do not favor individuals who fail to meet the minimum balance requirements.
- Interest rates:
If you are looking for a saving account with the highest interest rates, money market accounts are not your ideal option. Interest rates always vary depending on the type of bank or credit union.
However, most money market accounts will require you to have a certain amount in your bank account so that you can qualify for high interest rates.
For example, some money market accounts will require you to have at least $10,000 in your account to get the best rates.
Almost all bank accounts have service charges. So, before opening a money market account, ensure you know how much you need to pay at the end of the month.
Fortunately, some banks make it possible for you to evade the fees by meeting the daily minimum balance requirements. But not all banks offer this option. Consequently, the fees can take up a large percentage of your savings.
- Withdrawal restrictions
Like most savings account, you cannot withdraw past a certain amount from a money market account. Different banks and credit unions have their limits. And if you happen to withdraw past this limit, you get fined.
So, get an account that caters to your needs. If you prefer using cash from your savings account frequently, a money market account may not meet your needs.
Advantages of money market accounts
Despite having a lot of drawbacks, money market accounts are also beneficial. Some of their benefits include:
- Maximum fund protection
Saving through a money market account is safe. Here, your money is secure and insured. The FDI always insures money market accounts by $250,000. Thus, this account is a good place to save money. In fact, financial experts advise putting your emergency funds in a money market account.
- Saving power:
A money market account enables you to save money for various purposes. For example, if you desire to buy a house, one of the best places to save and get a down payment is a money market account.
- High-interest rates:
Using a money market account can multiply your savings. However, it is always advisable to look for a bank with the best interest rates that match your requirements. Generally, a money market account incorporates high interest rates that top up your monthly savings.
- Cheque writing privileges:
Money market accounts allow you to write cheques and transfer funds from one account to another. This is not the kind of service you can find in an ordinary savings account.
Join the money market world today
Money market accounts are one of the best places to invest liquid assets. Even so, the account poses several advantages and disadvantages.
Thus, before investing in a money market account, it would be best to understand how it works.