by Dan Caplinger | March 6, 2019
If you're looking to open a bank account, one of the key tradeoffs you'll often have to make is whether you want greater access to your money or a higher interest rate. Historically, if you wanted to have ready access to your money at all times, then a checking account was the obvious choice -- but checking accounts didn't tend to offer much in the way of interest. If maximizing your interest income was the key consideration, then a savings account would give you a higher rate than a checking account -- but you wouldn't be able to get as much access to your money.
Fortunately, the creation of money market accounts solved that dilemma for many investors. Rather than having to pick between access and a high rate, money market accounts offer the best of both worlds -- as long as you can meet the rules. Below we'll take a closer look at when money market accounts pay interest and whether the higher rate you'll often get makes up for the requirements that money market accounts have.
The general idea behind banks offering money market accounts stems from the need to deliver products that people want. Historically, customers were willing to accept the tradeoff of no interest in exchange for check-writing capabilities. But that changed over time, and now customers want to be able to get greater access to their funds while still maximizing the return they can earn on the money they have on deposit.
Money market accounts occupy a middle ground between checking and savings accounts. They don't offer the unlimited check-writing that a checking account allows, instead limiting you to six checks or other electronic withdrawals every month. They also tend to have greater minimum balances than savings accounts do, especially before money market accounts will pay the top interest rates available. Sometimes a money market account will have a tiered rate, with a lower rate applying to relatively low-balance accounts and a higher rate kicking in once your balance tops a larger amount.
However, in order to entice customers to choose money market accounts, the interest rates banks offer tend to be extremely attractive. The intent is to draw in the high-value customers who are best able to afford the minimum balances the accounts carry. For others, interest is still available, but you might well have to pay monthly maintenance fees that will more than offset any interest you earn.
In general, you can expect to get interest at whatever interval is set forth in the deposit agreement at your particular banking institution as long as you do the following:
What you'll find is that most banks pay your interest on your money market account on a monthly basis. At most financial institutions, that'll be the last day of the month, but some banks instead look at the day on which you open the account and then pay interest on that day of the month from there on out. It doesn't make any real difference in terms of how much money in interest you'll eventually get, but the right timing can be useful if you intend to use the interest income to help you pay bills or meet other living expenses.
Don't let yourself get confused between when interest gets paid on your money market account and when you have interest that's credited and pending to your account. If you look at many banks -- especially those institutions that have a heavy presence online -- you'll often find in your account summary a line that says how much interest you've accrued on your money market account. That interest exists and will eventually get paid to you, but it'll only show up as a posted transaction on the monthly or other basis that the bank chooses.
The reason for the disconnect between when interest gets credited and when it's actually paid on a money market account has to do with the method of compounding that a bank uses. Most banks use daily compounding, in that they calculate a balance on account for each day and then apply a daily interest rate to calculate that day's interest. It's that daily amount that gets added to the accrued interest that you might find on your online banking summary. However, even though the amount of accrued interest is taken into account in figuring out what the next day's interest should be, it doesn't show up in your official bank balance on record. Again, that doesn't happen until the interest is officially posted at the end of the month or other period.
If the primary reason for opening a money market account is to get a higher interest rate, it's important to jump through all the hoops required to get it. Doing your due diligence upfront will make sure that you don't get a nasty surprise when it comes time to receive your first interest payment, and it'll ensure that whatever top interest rate you were expecting to get will indeed be the amount that you receive.
Money market accounts can be extremely useful, and they can be the best possible savings vehicle available to maximize the amount of interest income you can receive. As long as you're aware of how interest works with these accounts and when you should expect to see your hard-earned money come in every month, you'll be on guard to make sure you do everything you need to do to ensure the flow of interest keeps coming in.
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