Investors can choose from many assets. Stocks and crypto can produce higher returns, but these investments require a higher risk tolerance. Some investors do not want to ride market volatility, especially investors approaching retirement. Stashing money in the bank keeps it safe, but you won’t get any meaningful returns.
High-yield money market accounts combine the safety of banks with respectable return potential. High-yield money market accounts won’t top stocks and crypto in bullish economic cycles, but these assets can provide reliable cash flow that can help you cover expenses. You can also reinvest the proceeds to increase future yields. So if you want a safer way to generate returns and build wealth, high-yield money market accounts can help.
What are Money Market Accounts?
Money market accounts balance the benefits of savings and checking accounts. You receive interest for keeping the money in your account, and you can withdraw from your account if necessary. Most money market accounts have restrictions that limit how many withdrawals you can make each month.
Money Market Accounts and Interest Rates
Money market accounts provide more respectable interest rates than traditional accounts, but many of them are a far cry from livable cash flow. The national average interest rate for money market accounts is 0.13% annual percentage yield. You can get much higher interest payments with a high-yield money market account. Some of these accounts offer 2% APY for your hard-earned cash.
Money market accounts get their interest rates based on low-risk financial investments such as short-term Treasury bills, bonds, and CDs. This dynamic prevents investors from getting fixed APY from their money market accounts. Instead, these bank accounts have variable interest rates based on market conditions. You may receive an introductory fixed APY when you open your money market account, but it will become a variable rate in the future.
How Often Do Rates Change on Money Market Accounts?
Interest rates frequently change on money market accounts after you complete the introductory period if your bank offers it. Your rate can change daily, but the rate won’t move dramatically like a growth stock’s price. Every bank is competing for your dollars, so it’s unlikely for one bank to drastically reduce the interest rate on their money market accounts. Most banks keep their interest rates close to the competition to keep as much profit as possible without losing customers to other financial institutions.
High-Yield Money Market Accounts vs. Other Savings Accounts Types
High-yield money market accounts provide risk-free cash flow that surpasses traditional checking and savings accounts. Some people use a certificate of deposit instead because CDs can have higher interest rates. However, it’s possible to find high-yield money market accounts that exceed CDs, and your money is more liquid. Certificates of deposit have withdrawal restrictions, and you will have to pay a fee to take out your money. You can withdraw funds from a high-yield money market account, but your financial institution may impose limitations. For example, some banks limit you to six withdrawals per month if you use a money market account.
If you use ATMs, checking and savings accounts give you more flexibility. You can withdraw from these accounts at will, but some money market accounts also have ATM compatibility. You will have to check with your financial institution if you frequently use ATMs to withdraw cash. Money market accounts may also have higher balance minimums than savings and checking accounts.
Money market accounts can earn more than money market funds, but some money market funds have tax-exempt interest. As a result, you won’t have to pay income taxes on these money market funds. Money market accounts do not offer the same tax protection, but they compensate for traditionally generating higher returns than money market funds. Money market accounts also have more protection, with the Federal Deposit Insurance Corporation insuring the first $250,000 in your account.
Should You Get a High-Yield Money Market Account?
A high-yield money market account gives you a risk-free way to earn additional income. These bank accounts have less commitment than a certificate of deposit and higher earning potential than most savings accounts. A high-yield money market account also lets you escape market volatility. While investing in crypto and stocks can lead to significant returns, these assets require a higher risk tolerance. Some stocks and crypto have doubled within a few years, while others have collapsed more than 50% within the same timeframe.
Money market accounts don’t embrace the boom or bust cycles that define assets like crypto. Some investors put extra reserves in a money market account to mitigate risk and feel more confident about investing in the stock market. It’s easier to ride economic cycles and market conditions if you have a diverse portfolio and plenty of available cash for emergencies.
Choosing Which Money Market Account is Right for You
Many financial institutions offer money market accounts to draw customers. Comparing choices will help you find the ideal money market account that optimizes your finances. You should consider these factors before committing to a financial institution.
Interest Rate
Most financial institutions offer competitive interest rates since this factor is the primary draw. Consumers open money market accounts to make additional income, and the highest interest rate often wins.
Balance Restrictions
Some high-yield money market accounts have minimum balance requirements. You’ll be limited in how low your balance can go, and some banks also limit your monthly withdrawals. Most financial institutions look at your balance before determining the interest rate. Having the minimum balance can result in a lower interest rate than if your balance exceeds the minimum.
Account Minimums and Fees
Not everyone has enough money to store for the account minimum. Some people need easy access to funds without worrying about falling below the minimum balance and incurring additional fees. These extra costs can hurt your profitability if you incur enough of them. Some banks are stringent with account minimums and fees, while others are more flexible.
Perks and Rewards
When you select a money market account, you don’t only get access to that account. Customers get access to the financial institution’s additional perks and rewards. You may start with a money market account, but like the flexibility of buying stocks, crypto, and other assets. You should consider the ecosystem of financial products a financial institution offers when deciding which money market account to open.
The Right Bank
You should work with a reliable bank or credit union that provides financial features that can improve your outlook. Partnering with the right bank can help you preserve funds and increase your wealth. Some banks only let you open accounts and see balance amounts, but this is not enough in modern finances. Some banks provide actively managed funds, ways to improve your credit score, and other valuable resources.
