Advice: When to Use Money Market Accounts

Money market accounts (MMAs) can be a great place to get the most out of the money that you've set aside for a rainy day.

Financial institutions offer FDIC-insured MMAs to their clients, just like they offer regular checking or savings accounts. The benefit? MMAs tend to offer higher interest rates than other deposit accounts. Zero risk for your money and a higher rate makes an MMA a much better place to stash your rainy-day cash than a savings account.

MMAs carry some conditions and restrictions that vary from institution to institution. In general, however, you are limited to a set number of transactions per month (about six total, including three checks), and must keep a relatively high minimum balance (often $1,000 or more).

BankingMyWay

These restrictions make an MMA less useful as an everyday account. But when you compare it to a savings account, which generally has its own transaction limit and minimum balance -- not to mention lower rates -- the MMA is generally the winner.

It's important to note that MMAs are not money market funds. The difference? MMAs are deposit accounts, and money market funds are mutual funds that invest in short-term debt securities. Money market funds are not FDIC-insured, and while they tend to be low-risk investments, you can still lose money on them.

Most financial advisers recommend setting aside three to six months worth of expenses in an emergency fund. If your monthly expenses are around $4,000, that means you need to keep anywhere from $12,000 to $24,000 on hand in case you get hurt, miss work or find a pink slip waiting on your desk. An MMA can be a great place to park this money.

Say you live in Michigan, where the average interest rate on savings accounts is 0.673%, according to BankingMyWay.com. If you sock your $24,000 away in a savings account at that rate, you'll earn a paltry $161 in your first year, and $815 after five years. If, on the other hand, you deposit your emergency fund in an MMA earning the state average of 2.014%, you'll earn $482 in your first year and $2,511 after five years.

While the purpose of a rainy-day fund isn't to offer a high-yielding investment, there's no point in missing an opportunity to pad your safety net a little. Choosing an account that offers a higher yield but the same amount of security and convenience just makes financial sense. This becomes especially true as increasing concerns about inflation crowd the headlines.

To research up-to-date MMA rates in your area, check out the money market section of the BankingMyWay.com Web site. You can search based on your city or zip code, and find the rates and account details offered by a number of institutions near you.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.

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