I was reviewing a client file the other day when I saw a line item on their balance sheet that I don’t often see today – a sizable money market account. It may be a product of the unprecedented interest rate environment we are currently living it, but I am not sure why anyone has a larger than average Money Market Account (MMA) today.
The basics of a Money Market Account are easy enough to understand, which is defined as,
An interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability. A money market account thus offers the account holder benefits typical of both savings and checking accounts. This type of account is likely to require a higher balance than a savings account, and is FDIC insured.
So you are getting some check-writing ability (there is often a monthly limit) with a higher interest rate than a savings account? Sounds great. Of course to offset those benefits the bank asks for your to give them more money – reasonable. Then why don’t I understand them?
I am not sure Money Market Accounts Make Sense
The FDIC releases national averages on money market accounts, savings accounts and CDs, and according to them this week’s averages are:
The higher amount you have to keep as a minimum just doesn’t provide anything in terms of return. Even if we were to take the extreme example of $100,000 the difference between .06% and .08% would be $20 in interest…for the year! As such, you have an account with a higher minimum for a marginal (i.e. barely dinner) difference in interest rate payments. One could just check out your favorite high yield savings account provider for a better deal. For example, the bank where I keep my liquid cash is paying nearly 10x the national average for MMAs. Granted I only looked for a few minutes but I was unable to find a higher yielding MMA than Capital One (ING) or Ally Bank’s plain vanilla savings account (which has no minimum).
It should be noted that a money market account is different than a money market fund.
Anyone have an MMA? What am I missing?