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What is a money market account, and how does it work?

Name ____________________ Date __________

Key ideas

  1. It is a bank deposit, not an investment. Money market accounts at insured banks and credit unions are covered up to $250,000 per ownership category, like savings.
  2. The rate is variable and can change anytime. Banks can raise or cut the rate without notice. Compare the APY with high-yield savings accounts before you choose.
  3. Fees can wipe out the interest. In the example, a $12 monthly fee turns $114 of interest into a $30 loss on a $3,000 balance.

Vocabulary

Money market account
A bank deposit account that pays interest like a savings account and may include checks or a debit card. It is FDIC insured.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
FDIC insurance
US government protection that repays your deposits if an insured bank fails, up to $250,000 per depositor, per bank, per ownership category.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
NCUA insurance
Federal deposit insurance for credit unions, run by the National Credit Union Administration and backed by the full faith and credit of the United States.

Work it out

Dana has $3,000 for emergencies. A money market account pays 3.75% but charges $12 a month below $5,000. A no-fee savings account pays 3.50%. Both rates are examples.

  1. Deposit
  2. Interest at 3.75%
  3. Fees, $12 × 12 months
  4. Money market after 1 year
  5. Deposit
  6. Interest at 3.50%
  7. Savings after 1 year

Check yourself

  1. Which of these is insured by the FDIC?

    • A. A money market fund at a brokerage
    • B. A money market account at an insured bank
    • C. A stock index fund
    • D. A Treasury bill

  2. An account pays $90 of interest a year but charges $8 a month. What do you net in a year?

    • A. You gain $82
    • B. You gain $90
    • C. You lose $6
    • D. You lose $96

  3. What usually changes the rate on a money market account?

    • A. The bank, at any time
    • B. Nothing; it is locked for a term
    • C. Only the federal government, once a year

Your turn

Open your savings statement and write down your rate, balance and any monthly fee. Then compare it with one money market account and one high-yield savings account at insured banks, using the APY for your balance.

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Answer key

What is a money market account, and how does it work?

Work it out

  1. Deposit$3,000
  2. Interest at 3.75%$114
  3. Fees, $12 × 12 months− $144
  4. Money market after 1 year= $2,970
  5. Deposit$3,000
  6. Interest at 3.50%$107
  7. Savings after 1 year= $3,107
  1. With interest added monthly, $3,000 at 3.75% earns about $114 in a year. The fee is $12 × 12 = $144, so Dana ends with $3,000 + $114 − $144 = $2,970.
  2. The no-fee savings account at 3.50% earns about $107, so she ends with $3,107.
  3. The lower rate leaves her $3,107 − $2,970 = $137 ahead. If her balance stayed above $5,000, the money market account would win.

Check yourself

  1. B. A money market account at an insured bank A money market account at an insured bank is a deposit, covered up to the limit. A money market fund is an investment. Treasury bills are backed by the US government, not the FDIC.
  2. C. You lose $6 The fee is $8 × 12 = $96 a year. $90 − $96 = −$6, so the account costs you $6 more than it pays.
  3. A. The bank, at any time Money market account rates are variable. The bank can change them whenever it wants, often following short-term interest rates.