How Liquid Are Money Market Accounts?

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How Liquid Are Money Market Accounts?
02 Mar 2022
6 min read

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Money Market Accounts differ from other assets in that they can be readily liquidated, whereas other investments cannot. Minimum balance requirements and limits on the number of monthly withdrawals are two variables that limit money market account liquidity. #TWN

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When putting together your investment portfolio, there are numerous factors to consider. You should be aware of your risk tolerance and investment strategy, as well as the kind of assets you intend to invest in. All of this is dependent on your objectives—both long-term objectives such as saving for your children's school and retirement, as well as short-term objectives. You may find yourself in a scenario where you require immediate cash, such as if you have a medical emergency or wish to travel. You can reach these goals by investing in a savings account that pays interest and allows you to make speedy withdrawals. You might put money into a savings account or a money market account (MMA), both of which are liquid assets that provide a higher interest rate.

Money Market Accounts

A money market account is a deposit account in a bank, credit union, or other financial institution. Traditional savings accounts provide a lower rate of interest than this account. Banks employ money market accounts to hold short-term liquid assets like Treasury bills (T-bills) and municipal bonds. Banks profit from these investments, which they divide among account holders. Withdrawing money from a money market account is as simple as withdrawing money from any other bank account. Many of them include debit cards as well as other services such as check writing. Account-holders may also be able to make withdrawals at their local bank or credit union branch. They are similar to standard checking and savings accounts in several ways, but they have a few constraints that limit their flexibility. Minimum balance requirements, withdrawal limits, fees, and other charges are all prevalent characteristics.

Money Market Accounts and Liquidity

Because money market accounts are extremely liquid assets, they differ from conventional investments. Money market account deposits are accessible for a quick withdrawal, except for some restrictions on the availability of freshly placed funds. It means that these accounts can be turned into cash fast and without losing value. Money market accounts have no maturity date because they are short-term deposits. When account holders liquidate their accounts, they do not lose any interest. Term deposits, on the other hand, demand that the account be kept open until the maturity date. Early withdrawals frequently result in interest being forfeited. Liquidity in money market accounts is constrained by two factors. Money market accounts, unlike checking and savings accounts, require account users to keep a minimum balance, which can range from $5,000 to $10,000 on the low end. Previously, federal regulations limited accounts to six transfers or withdrawals per month (any additional debit transactions resulted in a service charge). In April 2020, the Federal Reserve lifted the cap.

Deposit Base for Banks

Money market accounts are offered by commercial banks and credit unions to attract relatively large, steady deposits in exchange for slightly higher interest rates than savings and interest-bearing checking accounts. The financial institution's ability to make loans is boosted by this stable deposit base. The only real liquidity restrictions are the obligation to maintain specified balances and a limit on the number of withdrawals, which stem from this need for stability. Violations of these balance restrictions and transaction limits may result in lower interest rates or higher fees.

Money market accounts, which are federally insured deposit accounts, should not be confused with money market funds offered by investment banks.

Conclusion

The Federal Deposit Insurance Corporation (FDIC), which insures and regulates money market accounts, provides regulatory and structural support for these accounts. Of course, recovering a loss through insurance is not a realistic source of liquidity because it can take up to two working days. However, there is a key distinction between money market accounts and money market funds that is commonly misunderstood: government insurance.

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