How to Analyze Money Market Rates

A money market account combines the thrill of a short-term, high-yield investment with the security of a savings account, which often intrigues new investors. Much like a savings account, this type of account is accessible – meaning you can transfer money from your checking and savings accounts to it, and you can even write checks against this account. Yet it still offers higher interest – or money market rates – than a standard savings account. If you’re considering this investment tactic, you’ll want to be sure you comprehend the basics about rates on money market accounts:

Understand why money market accounts offer higher rates. This is because unlike with a savings account, the financial institution you’re partnering with is able to use your funds to invest in its own capital. Although you’re in a low-risk situation, the banks may wager your money in higher-risk gambits, such as federal securities and bonds. The bank owes you only the money market rates discussed on top of your initial investment, regardless of how much money it makes (or loses) in this time. Because you give the bank the chance to make money for itself with your money, in turn it pays favorable interest rates for this type of account.

Compare an array of rates from top banks. You’ll want to assess at least five banks’ rates to be sure you’re getting a competitive rate that accurately reflects the current market. Most sites offer calculators that can help you determine how much money you stand to make during the length of an agreement – typically about a year – given the current money market rates.

Know the money market rates are not the bottom line. In addition to figuring out the best annual yield (with compounded interest over time, if the length of term allows it) and how much money you’ll walk away with, there are other factors to compare. For example, some banks require a higher original deposit than others. Or you may need to sustain a certain minimal balance at all times. Some may have steeper fees if you need to cancel your account or if you accidentally withdraw more times than allowed per term (typically 3-6 per month). Start-up fees may simply be higher at some banks, negating the high money market rates offered. Look at the big picture and total costs before settling for what seems like the best money market account offer.