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Banking

What is a money market account and how does it work?

A money market account is a great way to save money and earn interest. They typically offer high yields in interest than traditional savings accounts. Money market accounts are not very popular in South Africa. This article will dive into what a money market account is and how it works.

Money market accounts are offered by banks and credit unions, they are very similar to savings accounts. The difference is that they tend to earn more interest, the difference in interest is not that big at first glance. Actually, there are savings accounts that edge money market edge money market accounts.

How do they compare to savings accounts?

When it comes to investing, even a difference of 1% is a lot. Most money market funds and accounts offer a rate that is slightly higher than savings accounts. However, African Bank offers an interest rate of 6.75% on savings accounts. This rate beats a lot of rates that you get from normal money market accounts and funds, which hovers between 5 and 6%. Most savings accounts offer between 2 and 4% in interest.

You need a lot of money to invest in a money market account, most banks require a starting deposit of R100 000. Absa requires a starting deposit of R1 million and the additional amount should be at least R100 000. This is a very high barrier to entry, that a lot of South Africans can’t reach. This is why money market accounts are less popular.

You can withdraw your funds any time you want, just like you would on a traditional savings account.

Money market accounts as an investment

Should you use a money market account as an investment? I personally would not recommend using a money market account as an investment. It’s better to use it as a way to park cash while protecting it from inflation. Money market accounts are especially good if you value liquidity.

However, there are other investments that offer higher returns than money market accounts. There is a difference between a money market account and a money market fund, accounts are offered by banks and funds are offered by mutual fund companies. These are companies like Allan Gray, they tend to offer better returns than banks and credit unions.

Conclusion

A money market account is basically a higher interest earning savings accounts. It is a good way to park cash and safeguard it from inflation. Do you have any thoughts or questions? Comment below.

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