When you put your money into a money market savings account it earns interest just like in a regular savings account. Interest is money the bank pays you so that they can use your money to fund loans to other people. That doesn't mean you can't have your money whenever you want it, though. That's just how banks make money -- by selling money! Basically, it works like this:
- You open a money market account at the bank.
- The bank pays you interest on the money that you deposit and leave in that account.
- The bank then loans that money out to other people, only they charge a slightly higher interest for the loan than what they pay you for your account.
The difference in interest they pay you verses the interest they charge others is part of how they stay in business. We'll take a look at how the interest on money market accounts works in the next section.
Interest on money market accounts is usually compounded daily and paid monthly. The cool thing about compounded interest is that the bank is paying you interest on the money they've paid you in interest.
Interest rates paid by money market accounts can vary quite a bit from bank to bank. That's because some banks are trying harder to get people to open an account with them than others -- so they offer higher rates.
Another difference you'll sometimes find with money market accounts is that the more money you have in the account the higher the interest rate you get. Always check with the bank about how the interest rate may change.