An individual money market account is insured up to $250,000 if you choose a bank or credit union covered by the National Credit Union Administration or the Federal Deposit Insurance Corporation. Don't confuse this type of account with a money market mutual fund, which isn't insured. A money market account often pays higher interest than a savings account, while allowing some check writing. Despite these advantages, money market accounts also have disadvantages.
Limited Transfers and Checks
A money market account has a major disadvantage for regular monthly bill-paying. You are allowed only six electronic transfers each month, with a maximum of three of these by debit card or check, according to Bankrate.com. There's normally no limit on the number of withdrawals you can make in person, by mail or by automatic teller. However, if you pay a lot of bills every month, you still need a checking account.
Variable Interest Rate
Money market account interest rates are often tiered, which means they depend on the balance in your account. For this reason, you usually qualify for the highest rate only if you have $10,000 or more on deposit. The interest rate on a money market account also fluctuates, without a guarantee for any period of time. If market interest rates fall, the bank or credit union can reduce your rate. A money market account doesn't safeguard your rate like a certificate of deposit, which normally pays a guaranteed rate until it matures.
Taxes and Inflation
Whatever interest you earn in a money market or other bank account is reduced by federal income taxes. Inflation also reduces the buying power of your money if the interest rate is less than inflation. According to Bankrate.com writer Don Taylor, it often pays to put some of your money in a CD with higher interest even if you have to pay an early withdrawal penalty.
Minimum Balance and Fees
Money market accounts usually require a higher minimum balance than regular savings accounts, sometimes as much as $10,000, according to Bankrate.com. You can be hit with a hefty fee of as much as $25 if your balance falls below the minimum. You can incur a penalty for writing too many checks. Some banks or credit union may also charge other fees, such as for exceeding a certain number of automatic teller withdrawals.
A money market account is a poor vehicle for many people to save for long-term goals. Because it doesn't have a set term and allows access to your money, it doesn't reinforce your will power. This is a disadvantage if you are subject to impulse purchases. On the other hand, a certificate of deposit ties up your money for a set term, and the early withdrawal penalty provides an incentive to leave your savings alone.
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