What is a Money Market Account

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A money market account is an interest-bearing account that can hold the assets of the account holders on a daily basis. A money market account is usually not intended for general payments: transfers and direct debits are not possible.

The interest on a money market account are usually much higher than for a savings account. This is due to a technical development, many money market accounts are offered exclusively as an online account. An account by mail, telephone or even branch visit is often excluded.

Thus banks save on administrative costs, which they pass in the form of higher interest rates to the customer. Second, as the cause of the aggressive marketing of many financial institutions, they try to make their terms attractive to new customers and sell them other profitable banking products.

Theoretical disadvantage of the money market pertains to the fact that the interest rate can be changed daily by the bank. A guarantee that a rate is valid for a long time is not a rule. Occasionally, however, banks promise potential customers a stable interest rate for a certain time (usually three to twelve months). After the expiry of the guarantee the balance returns to normal interest rates.

Another disadvantage is that the money market account is a purely credit account – it can not go into the red. To this end, the customers must then use their checking account. And the fact that the referral references back to the account in one to three business days, means that only when money on the reference account (usually the current account) can exclusively be disposed by transfer.

The problem with this situation is especially true if you put all funds in a savings account: If there is a short on a major purchase liquidity shortages can occur, although it can also be solved by paying through credit card or by short-covering of the reference account.

The minimum legal requirements in many countries banks offer additional backups. In Germany, this entails the deposit insurance fund of the respective banking associations, which protects more than the statutory requirements.

Deposits in money market accounts are subject to the deposit insurance, and are therefore gilt-edged. In some countries the mandatory deposit insurance limit is 100% of the total deposits, but not exceeding $50 000. Other countries exceed this statutory requirement.

Occasionally financial institutions use the term “overnight” in connection with products that are not linked to money market accounts. In particular banks offer savings accounts that directly offer similar products to money market accounts with high interest rates on their assets in a defined framework.

Money market accounts are very popular expecially due to their flexibility and independence which is highly appreciated by younger investors. Older people are known to favor the savings account; often there are psychological factors that play a role in the decision to keep the savings account. The fact that it is on a document, you can touch is a very important aspect to some.

Other people do not have the flexibility or the need to deal with the new money market account : If you want to have high interest rates you should open a savings account as an online account. Older people are not receptive to this form of banking and prefer to stay in their long-standing branch bank.

On another level, the shifting of funds from savings accounts to money market accounts does have a relative reduction impact on money supply. In money supply shares in money market funds, money market instruments and bank bonds with a maturity up to two years fall under M3.

Whereas M1 entails demand deposits and currency in circulation. These also include deposits on money market accounts. The money supply M2 includes M1 +: Time deposits of up to two years and savings deposits with maturity up to three months’ notice.


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