Just like a regular savings account, a money market account is a type of savings account that is offered by banks and credit unions. The main difference is that money market accounts will usually pay higher interest, have higher minimum balance requirements, and often they only allow three to six withdrawals from the account per month. With most market money accounts you are also allowed to write checks on the account.
If the account is held in a qualified bank, the money in a money market account is insured by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank or credit union goes out of business your money will be returned to you.
With credit unions, your money is insured by the National Credit Union Administration (NCUA), another federal agency that protects consumers from loss.
Like a regular savings account, the money that you invest in a money market account earns interest. Interest is the money that the bank or credit union will pay you in order for them to use your money to fund loans to others.
In very simple terms the process works like this: You put your money into a money market account. The bank or credit union will pay you a certain amount of interest on that money. The bank or credit union will then loan the money out to others but they will charge those borrowers more interest than what they are paying you.
The difference between the interest that they pay you as compared to the interest they charge those who borrow is how they make a living and how you earn on your investment with the bank.
The interest on money market accounts is usually compounded daily and paid monthly. Compounded interest is one of the best ways to earn money from the bank. In essence, they are paying you interest on the money they have already paid you in interest.
Interest rates paid by money market accounts will vary from bank to bank. This is one good reason to shop around for the best rates before signing on with any bank.
In many cases, the more money you keep in the money market account the higher the interest rate you will get. You should ask about this when shopping for a bank.
You can take money out of a money market account but there may be some fees involved. Normally, you are allowed only a certain number of withdrawals each month. Most banks will charge a fee of around $5 if you do not keep a certain minimum balance in the account. You may also have to pay a fee if you go over the limit on withdraws per months.
You will receive a statement each month from the bank or credit union. This statement will tell you the transactions as well as any fees charged to the account and it will also tell you the interest your money has earned.
During any given month, you are also allowed to add money to the account. This is a very good way to make your savings grow fast.
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