5 ways to build wealth using a high-interest money market account, which pays up to 200 times more than the alternative
- High-yield accounts at online banks can offer 200 times more interest than accounts at brick and mortar banks.
- A money market account is a low-risk account with FDIC insurance, just like a regular savings account. It is not the same thing as a money market investment fund.
- You can find money market accounts with no monthly recurring fees, no minimum balance requirements, and well above-average interest rates.
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Interest rates may get a lot of attention in the news, but it's for good reason.
Whenever the Federal Reserve sets a new target interest rate, the rates we earn and pay variable interest accounts, like credit cards and savings accounts, will likely follow suit.
If you have money in savings, or are working to boost your savings balances, it's important to choose the right account. Among savings accounts, money market accounts can offer even better interest rates than regular savings.
Here are five good uses for a high-interest money market account that you may want to consider.
Keep your emergency fund safe
Every single person should have a financial plan in case of emergencies. Things like broken-down cars, busted furnaces, and unexpected layoffs happen to people every day. Yet 39% of American households couldn't come up with $400 from savings. They would have to use credit or sell something if they could cover the cost at all.
If you don't have an emergency fund, $400 should be the absolute minimum. Most people should try to keep at least three to six months of expenses in an emergency fund. If you are self-employed or don't have a stable job, you should double that to at least six to 12 months. Putting it in a high-yield account gets you interest along the way and protects your money with FDIC insurance coverage.
Earn the best interest rates on your cash
The average interest rate in the US is currently around 0.10% - yes, that's one-tenth of 1%. At some of the biggest banks in the country, the rate is as low as 0.01%. You can't get any closer to zero without adding a new digit! That interest rate is really, really low.
On the other hand, high-yield accounts currently pay around 2% or more, which is as much as 200 times as much as the lowest-paying accounts. If you are retired and want to keep a lot of cash on hand, a high-yield account is perfect because it will give you the maximum return on your cash with the lowest possible risk.
Save for multiple goals automatically
In his book "I Will Teach You To Be Rich," author Ramit Sethi showed an example of how you can save for a wedding, travel, and other future expenses automatically using multiple savings accounts. If you open an account for each unique goal, you can create automatic transfers every payday that will move the funds without your having to remember or lift a finger.
When you put the money into dedicated high-yield money market savings accounts, you are less tempted to use the funds for anything else. And like other use cases, you get the best interest rates while keeping your money very safe.
Build an investment fund
My wife's family made their living in real estate, and now we are interested in adding real estate to our investment portfolio. But unlike a stock or ETF, I can't buy a rental property with a few thousand dollars. We need to save up a bigger down payment to make our real estate plans come true.
We have a good start on the down payment for a second property, but we are not there yet. In the meantime, our funds are sitting in a high-yield money market account at Capital One Bank earning us a little something in the meantime.
Create a loan sinking fund
Last month, my wife and I bought a new car to make room for our growing family. After a lot of debate, we decided on a new Toyota Sienna Minivan. Thanks to our 800-plus credit scores, Toyota offered us a loan at 0% APR. That's too good to refuse!
I would never pay off a 0% loan early. That's free money you can use to earn interest elsewhere, even if you could afford to pay it off right away. Businesses in a similar scenario use a "debt sinking fund" where they save up cash, earning interest, that they will later use to pay off a debt. If you wanted, you could use a dedicated bank account for this purpose.
Use your high-interest account any way you want!
There is no right or wrong way to use a high-yield savings account, but there is something wrong with keeping your cash at home under the mattress. The best online high-interest accounts have no minimum balances, no recurring fees, and give you much better rates than you would get at a local bank branch.
Your money is too important to leave in a bad account or ignore. With a quality savings account in your financial arsenal, you know your money is safely growing and available when you need it. If your bank account isn't doing the same, it might be time to change things up.
Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.