A money market account is a bank account that combines popular features from both savings and checking accounts. Like high-yield savings accounts, money market accounts (MMAs) usually offer competitive interest rates on deposits. Similar to a checking account, they often come with checks or a debit card that can be used to access funds.
Money market accounts also provide a “safe” place to store your money. Unlike investment accounts, MMAs are insured by either the FDIC or the National Credit Union Administration (NCUA). This means deposits are guaranteed to the allowable limit ($250,000 per person, per bank, per ownership category) by the full faith and credit of the United States government, even if a member bank or credit union files for bankruptcy and goes out of business.
Pros and Cons of Money Market Accounts
Money market accounts are popular savings vehicles for many Americans, but they aren’t the right choice for everybody. Here are some things to consider before putting your money into an MMA.
- Money market accounts usually offer higher rates than most traditional checking or savings accounts.
- These accounts provide relatively easy access to your money through checks, a debit card, or both.
- Accounts are readily available to open online.
- Funds in a money market account are protected by the FDIC or NCUA.
- Money market accounts often have higher minimum deposit requirements to open the account.
- Some accounts charge fees if balances drop below the required minimums.
- Withdrawals and transfers from a MMA are limited to six per month.
- Online savings accounts, particularly high-yield savings accounts, may offer similar interest rates.
How to Choose a Money Market Account
When comparing money market accounts, the most important factor to consider is the interest rate being offered. This is measured by something called the annual percentage yield, or APY.
Essentially, the APY measures the amount of interest you will earn from your initial deposit. Also included in the rate is any compound interest earned. An APY is expressed in the form of a percentage and calculates the total amount of interest earned over the course of a year. The interest is usually compounded daily and paid out on a monthly basis.
Many MMAs also have minimum opening deposit requirements. These requirements range from just a few bucks to several thousand dollars, so it is important to know and compare any requirements between banks. Minimum opening deposits for money market accounts are often higher than they are for savings accounts, although that is not always the case.
Additionally, most banks also have minimum balance requirements. Accounts that fall below the minimum balance requirement may be subject to additional fees or earn a lower than desired interest rate.
Keep in mind, the minimum requirement to open an account and the minimum balance requirement for the same account may differ. For example, an account may require a $1,000 deposit to open but a $10,000 minimum balance to avoid a monthly fee. Make sure you understand any requirements prior to opening an account. Other things to watch out for include service fees, penalties for early account closures, fees on inactive accounts, and more.
Money Market Accounts vs. Other Bank Accounts
What is the difference between a money market account and other bank accounts? Here are a few comparisons.
Money Market Account vs. Savings Account
Savings accounts and MMAs may share similarities, but they are technically different. Money market accounts often provide higher interest rates than savings accounts — especially savings accounts offered at traditional brick-and-mortar banks. With the evolution of online banking and high-yield savings accounts, however, this gap has narrowed considerably.
Both types of accounts are limited to six withdrawals and transfers per month. With that said, MMAs almost always come with a debit card or checks so you can access your money quickly.
Money Market Account vs. Checking Account
Although a money market account often comes with checks, it is considerably different than a personal checking account. As mentioned above, MMAs are legally restricted to just six withdrawals or transfers a month. Checking accounts are not usually subject to limits on the number of transactions that can be made each month. This makes them a much better spot to store money that can be used for regular spending and bill payments.
On the other hand, even the best checking accounts rarely earn much — if anything — in interest. This makes a MMA a better place to save for short- and medium-term goals.
Money Market Account vs. Certificate of Deposit (CD)
Both MMAs and CDs can be good places to safely store your money while earning interest. However, a money market account provides significantly more access to your money than a CD.
With a MMA, you can access your funds at almost any time by using the provided debit card or check. You may incur fees for closing your account early (usually within 90 days of opening) but the money is available to you at any time. Using a CD almost always includes locking your money up for several months or years. Withdrawing your money early usually means you will be hit with heavy penalties which often wipe out any gains you may have earned.
Money Market Account vs. Money Market Fund
A money market account and a money market fund are two completely different financial products. Money market accounts are savings vehicles that are insured by the FDIC or NCUA.
Money market funds are relatively low-risk investments, but they are still investment products. That means they are not insured by either the FDIC or the NCUA, nor are they intended to be used in the same way as a MMA. Instead, money market funds are regulated by the Securities and Exchange Commission and designed to provide investors with ongoing income rather than interest earnings on their savings.
When to Consider a Money Market Account
Is opening a money market account a good idea? Here are some reasons you might want to consider using one:
- Emergency Fund — Using a money market account for your emergency fund is a great idea. Doing so means your emergency fund will be kept separate from your spending money. You’ll also be able to access the money when you need it but still earn a decent interest rate until then.
- Short-Term Savings Goals — A MMA is also a smart place to store money for short-term savings goals. This could include things like buying a new car, home remodel, and more. Again, you’ll have relatively easy access to your money while still earning a little bit of interest.
- Vacation Fund — Like other short-term savings, putting money aside for vacation expenses is a great use of a money market account. Having a separate account for vacation helps ensure that you won’t accidentally spend the money on other needs. It is fun to watch the account grow, but it is even more fun to return home from your trip without any debt. Plus, you’ll earn a little interest while you save.