Money Market Account As An Investment: Is It Worth it? - YouTube

hey guys and welcome to our podcast today we're  gonna be discussing about money market accounts  

as an investment how exactly does it work why  you should consider it and what are the risks  

many people wonder what to do with the  money they have put aside invest it or  

keep on saving it what do you think however  you can always do both by putting the extra  

cash into a money market account or an  MMA these accounts are offered by banks  

and credit unions and are very similar to  deposit in savings accounts however they  

provide investors with higher interest rates  therefore you can generate higher yields this  

article will show you how these accounts  work what their pros and cons are how to  

manage them as well as some other important  things to know let's get straight to business

as mentioned in the intro there mechanism is very  similar to one of savings accounts MMA's tend al  

for higher interest rates than saving accounts  this means that the more money you put the more  

money you will earn below you can read some of  the most important things about money market  

accounts first you set up an account at a bank  or another financial institution the bank will  

pay you interest because you have put money into  their account they are paying you for using your  

cash the bank consequently will lend this money  to people at an interest rate you can withdraw  

your money whenever you want check the section  on how to manage an m2 Mae for more details on  

it the bank pays you a compound interest see more  details in the section how interest is calculated  

let's begin with the benefits of MMA's that they  offer money market accounts offer higher interest  

rates and higher yields money market accounts  tend to pay higher interest rates than other  

similar accounts in addition the rate that  they offer is compounded which means that  

the more your balance grows the more money the  bank will pay you compound interest rates are  

where they pay interest on the interest and they  compute it on a daily basis self Investments is  

another great benefit these accounts are  considered safe and low risk investments  

since they are protected by the US government  if you have a bank account it will be insured  

by the Federal Deposit Insurance Corporation  the FDIC which means that even if the bank  

goes bankrupt your money will be restored  to you there is a limit though $250,000 if  

you exceed this limit the money above the mark  will not be insured if you have a credit union  

account it will be insured by the National Credit  Union Administration the NCUA which is just like  

the FDIC another advantage of these accounts is  their accessibility for many people easy access  

to their money is very important understandably  you can easily withdraw money from cash machines  

or write checks and make transactions keep in  mind that there is a limit on these operations

in spite of the great benefits there are a couple  of disadvantages we should consider talking about  

in the money market accounts the first is the  higher minimum balance requirement MMA's usually  

have a higher minimum balance requirement this  is the minimum amount of money your bank wants  

you to have in the account they usually range  between 1000 and $2,500 for instance the Bank  

of America requires $2,500 if you fail to  meet that requirement you will be fined in  

comparison most savings accounts are free of  charge with regard to this requirement also  

there are a limited number of withdrawals the  number of Luther Charles you can make is fixed  

you exceed this number you will have to pay a fee  sometimes the fees are higher than the interest  

you have generated on your money another thing  to remember is that overall the interest rate is  

relatively low compared to savings accounts  the interest rate is higher but compared to  

other investments say bonds the interest rate  is significantly lower for instance the average  

return from investments in the stock market is 10%  a money market account can generate approximately  

6% per year in the long run this difference can be  crucial inflation risk is another thing we should  

take into account inflation always poses a serious  risk to investments that generate lower interest  

rates basically inflation decreases the value of  money in the future in 1999 $2,000 was different  

than $2,000 now for instance your Mme may have  an annual interest rate of 2.5% but at the same  

time inflation in the country is 3.4 last but  not least is the transaction limits even though  

you can access your money in the account there  will be limit by law you cannot make more than  

six payments a month using your MMA bear in mind  that this number might even be lower depending on  

your bank or Union definitely you will not have  the flexibility you can having a checkbook or  

a debit card now I would like to show you how is  the interest calculated in an MMA as I explained  

earlier the interest and MMA pays are compounded  your bank will compute it every day and distribute  

it monthly a compound interest is the money a  bank or credit union will pay you on the original  

amount of money as well as on the interest you  have earned for instance if you put $5,000 in a  

money market account at 6% of an annual interest  rate for the first month the interest you'll earn  

will be $25 5,000 times 6 percent equals 25 for  the next month however the interest calculated  

will be based on five thousand twenty-five  dollars you can see how your money would grow  

exponentially and the amount of interest grows  by the day this is particularly lucrative if you  

put large amounts of money into the account for  example if you put a hundred thousand dollars  

in a money market account for ten years at five  percent the whole value which you will receive at  

the end of the term will be one hundred and sixty  four thousand dollars that's pretty impressive

however you should know some general details on  managing your money market account as you already  

know as most savings accounts you can withdraw  money at all times however if you exceed the  

number of free withdrawals you will have to pay a  fee so be careful and know how many times you can  

withdraw money usually for each withdrawal above  the permitted number you will pay a fee of $10  

it depends on the bank though in addition there  are some fees you owe in case you don't have the  

minimum required balance in your account again  depending on the issue or you will have to pay  

a fee of between five and ten dollars before you  purchase a money market account compare different  

banks and offers for the best terms and read  the fine print when you set up an MMA the bank  

will give you a register this is something like a  diary where you will record all your transactions  

withdraws balances pretty much everything you can  use your register to track your money and know  

what's happening in addition to that your bank  will send you a monthly statement of your account  

this statement will show you your balance during  the month the transactions you have made and the  

interest you have earned if you want to make  sure everything runs smoothly yes banks do make  

mistakes you have to reconcile this is a process  of comparing the data in your register with the  

data on your monthly statement there is a mistake  try to correct it either you or the bank has made  

a mistake now let's discuss the difference  between money market accounts - money market  

funds these two things are commonly mistaken and  confused people so let me compare them for you  

to begin with and mmm is a savings account as  you already know while a money market fund is  

a type of mutual fund the latter is an investment  fund not an account in a bank therefore you will  

not have an FDIC or NCUA protection it's good to  mention that mm f's just like other mutual funds  

might invest in a variety of assets including  government bonds having said that including  

the fact that government doesn't protect them  mm F's carry greater risks money market funds  

offer a greater variety than MMA's and also  can have some tax benefits both mm F s and M  

mas depend on various factors including inflation  or recession the latter affected both negatively  

the recession did not hit money market accounts  as badly as it did money market funds so let's  

see who can benefit from an Mme having discussed  all the pros and cons as well as the way MMA's  

function let's mention who these investments are  most suitable for investors who have spare money  

and want to be safe and secure people who want to  have an easy access to their savings investors who  

can't afford to keep the minimum required  balance a person who doesn't need to write  

too many checks from their Mme a person having  money market accounts in the same Bank where you  

keep other accounts this will make the process  of making transactions very fast and very easy  

in the bottom-line money market accounts are  a very simple and easy to handle investment  

opportunity even though they have some drawbacks  it's safe to say that they offer some great perks  

that's it for now on our website you can find  more posts and podcasts as well as calculators  

and other financial tools do you have a  money market account we would love to know  

your thoughts so feel free to share them  on the comments below I hope you enjoyed  

it don't forget to subscribe to our podcast  channel on YouTube and we'll see you next time