Money Market Deposit Account
A money market deposit account, also known by the acronym “MMDA,” is a type of savings account offered by banks and other financial institutions. Although federally insured, it differs from traditional savings accounts by providing a higher rate of interest. Unlike other types of insured, high-interest accounts, money placed in a money market account is available to the account holder at any time instead of being held for a committed time period.
What are the Benefits of a Money Market Deposit Account?
In addition to being federally insured and providing higher interest rates, a money market deposit account also has several other benefits.
Immediate investment opportunities – When using a money market account, investments can be made immediately in mutual funds, stocks and bonds.
No withdrawal penalties – There are no penalties for withdrawing money from a money market deposit account, as there often are with IRA’s and other high-interest investment accounts.
Fast access to funds – Money can be withdrawn from money market deposit accounts using checks, and in some cases, debit cards. Although not the same as a traditional checking account, money is removed in a similar fashion.
Choice of providers – Money market account providers include banks, brokerage and mutual fund companies. This means there is an opportunity to shop around and find the best interest rate available.
Convenience – These accounts make convenient places to hold money from recent investment sales and estate settlements, and to store money that will be used for upcoming investments.
What are the Disadvantages of a Money Market Deposit Account?
Although there are many benefits, there are also some disadvantages of money market deposit accounts.
Limited transactions – Because a money market deposit account accrues higher interest than a typical checking or savings account, the number of transactions allowed per month is limited, usually to five or less.
Higher balance requirement – In order to receive the highest interest rate, many financial institutions require that a minimum balance is maintained in the account at all times. Some banks require a minimum as low as $500, while others have much higher minimums.
Interest rates vary – Interest rates on money market deposit accounts are not locked and may vary from institution to institution. In addition, the account may accrue the highest interest when the economy is stable but fluctuate wildly during times of recession.
A money market deposit account is a good choice for retirees or investors that would like to store their money while earning a high-interest rate, still maintaining instant access to funds and being insured against loss. For a long-term investment, other accounts may offer even higher interest, but they may be less secure. Many people choose a money market deposit account for the flexibility and security they provide.
How to Save for a House Deposit
House prices have increased substantially over the past 10 years, making it more and more difficult for young people to get a foot onto the property ladder. However, first time home buyers should not despair. Despite the high prices, if a sensible savings plan is adopted, it is still possible for prospective purchasers to get into their very first home.
Cut Back on Luxuries
Unless a person is very well off, it is inevitable that sacrifices will have to be made when it comes to saving up for a home.
Budgeting software such as Moneydance can also prove extremely useful. Keeping careful track of exactly what is being spent enables the user to cut back on unnecessary expenses. Seeing the steady growth of any savings also helps keep the individual focus on their ultimate goal.
Moving in with the Parents
This may sound crazy but it is an option that increasing numbers of young first home buyers are taking. Living with family for a period of time allows individuals to save their money at a faster rate as they are not pouring their cash into the rent. Most young people will either pay their parents for their cost of living or will contribute in some other way, by cleaning the house or doing chores. This is a small price to pay if it facilitates a swifter move into that very first home.
Choose a Premium Savings Account
There is no point in leaving house savings in a standard checking account, where the money will not be accumulating any interest. First home buyers should make their house savings work as hard as possible by opening a high-interest savings account. In the United Kingdom, Abbey offers an e-saver account, which pays an interest rate of 6.50%. In the United States, HSCB offers very flexible online savings account with an interest rate of 3.05%/APY, one of the highest savings rates in the country.
Many banks will even offer a savings account specifically for people saving for their first home. For example, in New Zealand, the National Bank Home Savers Account earns 7% in interest if at least $20 is deposited during the preceding month.
Be Aware of Market Conditions
Internationally, house prices have been inflating rapidly for the past decade. However, the tide has now begun to turn. The United States and the United Kingdom are both experiencing a property slump. Even countries as far removed as New Zealand are facing a significant slowdown in the housing market. Although this is bad news for property investors, owners of rental properties and individuals needing to sell their homes, it is good news for young people dreaming of purchasing their first home.
With the market cooling, the property will become more affordable and getting into a home will be easier. The only thing to be aware of is that, even though property prices are falling, the interest rate on mortgages may still be high. Prospective purchasers should certainly keep their eyes out for any bargains but should also make sure that they do not become lumbered with an overly high mortgage rate, especially as these unsustainable interest rates should gradually start to come down over the next six months or so.
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