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Don’t lose out on interest.
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Sometimes we break up with bank accounts, and that’s perfectly okay. It’s a good idea to reevaluate your banking needs from time to time (and as your financial circumstances change), and since banks change their offerings, you might find a better interest rate or fewer fees with a new bank. That said, if you have a money market account (or MMA) and are considering taking your money out of it while leaving the account open, proceed with caution.
Money market accounts have features of both checking and savings accounts. You’ll earn interest on the money kept in one, as you would with a savings account. And just like with a checking account, you’ll be given easy access to the money in one. Money market accounts often come with check-writing capabilities, an ATM or debit card, or sometimes both. Best of all, MMAs are a safe place for your money, as they fall under the protection of FDIC insurance if your bank is covered by it (this means up to $250,000 kept in one will be returned to you should your bank fail). Sounds like a pretty good deal, right? Here’s why it’s worth keeping yours funded — or closing it outright if you’re changing accounts.
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You could be charged fees
Some money market accounts have a minimum balance requirement to keep the account free of fees. Bank fees are worth avoiding under all circumstances, so if your MMA is one that will charge you a monthly fee for falling under that minimum, and you’re planning to keep the account open while removing some money from it, ensure that you’re leaving enough cash in place.
You won’t earn as much interest
Another reason it pays to keep your MMA funded if you have one is that you’ll miss out on the chance to earn extra money on top of your existing money — your account’s APY, or annual percentage yield. This comes into play with a money market account in two different ways.
First, the more money you keep in the account over a longer period of time, the more money you will make on it, thanks to the wonder of compound interest. For example, if you keep $10,000 in your MMA and earn 4% APY on it, without adding additional money to it, in a year, you’ll have $10,407.42. Wait another year without adding to the account, and you’ll earn that 4% APY on $10,407.42, giving you an additional $416, for a total of $10,831.43 — and so on.
The second way you could lose out by removing money from an MMA is if your account has a minimum balance requirement to earn the highest APY, as some do. If you withdraw money from the account and your ending balance is below the threshold, you’ll find yourself earning a lower APY.
It’s okay to move your money around
All of this isn’t to say that if you’ve got a chunk of money (perhaps your emergency fund?) in a money market account, you absolutely must leave it there. Like I said above, your banking and financial needs are likely to change over time. And these days, high-yield savings accounts are paying APYs comparable to the best MMAs, so if you don’t want to worry about minimum balance requirements and don’t care about having ATM or check access to your cash, switching to one of these could make sense for you. Just keep in mind that defunding an MMA without actually closing the account could result in losing some precious cash (in the form of fees or lower APY) as a result.
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