How Can I Use Money Market Deposit Accounts?If you have $5,000 or more sitting in a traditional checking account, can you earn more elsewhere and still have freedom to take the money out? With a money market deposit account (MMDA), you can. If you are saving up for a new car and don't want to risk the volatility of the stock market, can you keep it in a low-risk account while it grows at a healthy rate? With MMDAs, you can.
MMDAs offer more liquidity than certificates of deposit, as well as higher yields than most traditional savings and checking accounts. The cost of this convenience is that they typically require that you keep more of your money invested in them. As a result, they are popular with individuals and companies who have a large amount of money to park for relatively short periods.
Here are some examples of institutions and individuals who use money market deposit accounts:
- Individuals who are saving up for a home, vacation, or other large purchase
- Individuals maintaining emergency funds, such as two to three months of salary as a "cushion" to safeguard against medical costs, interruption in employment, etc.
- Investors who are waiting for an opportune moment to buy stocks, mutual funds, or other investments that can fetch higher returns
- Individuals who employ various formula investment plans, where they keep a certain amount in an MMDA and withdraw from it according to the formula to purchase stocks or mutual fund shares, or perhaps tangible investments such as metals
- Individuals and institutions who want a safe place to park funds earned from selling off assets such as stock or a home
- Individuals saving for retirement, either through standard MMDAs or MMDA IRAs
- Individuals saving to pay tax bills or various expenses
- Businesses investing surplus funds for short-term needs
- Non-profit organizations saving their funds for eventual use
- Government bodies investing their tax revenue
Their liquidity and competitive rates make MMDAs popular for a variety of uses, many of them short term and many of them long term. They have become a very useful part of many financial plans, both for individuals and for companies as well.