What Is a Money Market Account? (original) (raw)

A money market account (MMA) is a type of insured bank account that works like a hybrid between a checking and savings account.

A money market account typically earns a higher interest rate than a traditional savings account, but you can typically spend directly from it like a checking account. However, there could be minimum balance requirements and/or limits on withdrawals, so it may not be the right choice for every financial situation.

Key Takeaways

• A money market account is an insured deposit account offered by banks and credit unions.
• A money market account typically offers a higher interest rate than other kinds of savings accounts while letting you maintain access.
• There may be a limit on the number of withdrawals or transactions you can make each month, and you may have to maintain a minimum balance.
• Some money market accounts charge fees.

What is a Money Market Account?

A money market account is an interest-earning savings account that many banks and credit unions offer. Deposits up to $250,000 are federally insured; the Federal Deposit Insurance Corporation (FDIC) insures bank accounts, and the National Credit Union Administration (NCUA) insures credit union accounts.

A money market account typically earns a higher annual percentage yield (APY) than a traditional savings account. The national average money market account APY is currently 0.75%, while the rate on savings accounts is 0.49%, according to Curinos.

You can always access the funds in a money market account, often via a card or checks. That sets a money market account apart from a certificate of deposit, where you face a penalty for withdrawing money early.

However, you may be limited on the number of withdrawals you can make each month from your MMA. Some money market accounts may impose fees if you exceed the number of allowed withdrawals or drop beneath the required balance.

Pros and Cons of Money Market Accounts

Here are some of the potential advantages and disadvantages of money market accounts:

Pros

Higher interest rate: Most money market accounts earn a higher interest rate than traditional savings accounts.

Insured deposits: Your deposits are federally insured up to $250,000.

Access money when needed: You can usually write checks or use a debit card to access your funds whenever you want.

Cons

Limited transactions: Many institutions limit the monthly number of withdrawals from a money market account.

Minimum deposit and balance: You might need to make a minimum deposit to open a money market account and maintain a minimum balance to avoid fees and/or remain eligible for the highest interest rate.

Lower interest than CDs: A money market account may not earn as much interest as other savings account options, such as a CD.

How Do Money Market Accounts Compare?

Comparing money market accounts with other types of accounts can help you make an informed financial decision about where to allocate your money.

Money Market Accounts vs. Savings Accounts

Savings accounts and money market accounts have a lot in common although there are a few differences.

Similarities

• They are both federally insured accounts that encourage you to “park” your money in the bank.
• Both types of accounts earn interest, although money market accounts typically pay higher interest rates.
• You can easily access your funds from both accounts.

Differences

• Savings accounts typically don’t allow you to write checks or use a debit card.
• A savings account may be easier to open.
• There may be higher minimum balance requirements for a money market account.

>> Related: Learn more about money market accounts vs. savings accounts

Money Market Accounts vs. CDs

A certificate of deposit (CD) is another type of interest-bearing account that has some similarities to a money market account.

Similarities

• Both accounts offer higher interest rates than a traditional savings account.
• They are both federally insured up to $250,000.

Differences

• You must keep your money in the CD for a set time. Generally, the longer the term, the more interest you can earn.
• Withdrawing funds from a CD early will usually incur a penalty fee.
• With a money market account, you can withdraw your money at any time without penalty.

Money Market Accounts vs. Money Market Mutual Funds

Although the names are similar, a money market account isn’t the same as a money market mutual fund. A money market account is a savings account whereas a money market mutual fund is an investment that generally offers better returns than a savings account.

Similarities

• Some money market mutual funds may allow you to write checks.
• Both accounts can earn you a return on investment.

Differences

• Since they’re an investment, money market mutual funds are not federally insured.
• If you want to invest in a mutual fund, you’ll usually have to go through a brokerage or an investment firm instead of a bank.
• Most mutual fund accounts don’t allow withdrawals via debit cards or electronic transfers.

Money Market Accounts vs. Checking Accounts

There are a number of similarities and differences between money market accounts and checking accounts.

Similarities

• Both options allow you to complete transactions via physical checks and/or debit cards.
• Both are insured by the federal government.
• You can generally withdraw money from a checking account or a money market account via an ATM or at a physical financial institution.

Differences

• Most checking accounts don’t earn interest. Those checking accounts that do earn interest generally offer a far lower interest rate than a money market account.
• A checking account typically allows you to make unlimited transactions but most money market accounts limit the number of withdrawals/transactions you can make every month.

Best Uses for Money Market Accounts

Opening a money market account can offer many benefits, especially in certain financial situations.

• Emergency fund: A money market account is a good way to save for a financial emergency. The money you put into the account will grow over time thanks to interest, but you can access it whenever you need to.
• Unallocated cash: If you have some extra cash that you aren’t ready to spend but also don’t want to lock away in a CD or investment account, a money market account offers a good middle ground.
• Short-term savings goal: If you’re saving for something in the near future, such as a vacation or down payment on a home, an MMA offers a higher interest rate than a savings account. The transaction limits can encourage you to keep your money in the account instead of spending it prematurely.

Remember to consider all the pros and cons before you decide which type of account is best for your needs.

How to Choose the Best Money Market Account

Each bank and credit union determines the interest rates, fees and other terms for the money market account it offers. It’s important to compare several options to find one that best fits your financial goals. Here are some of the most important factors to consider:

• Minimum deposit or balance requirements: Some MMAs have a minimum deposit requirement or a minimum balance you must maintain in the account to avoid fees and/or get the highest interest rate.
• Transaction limits: Some banks and credit unions limit you to six or fewer withdrawals/checks per month on an MMA, whereas others don’t have a limit.
• Fees: Some institutions charge monthly fees, so make sure you understand how much they are and what you can do (if anything) to have them waived. Check if there are fees for certain types of transactions or penalties if you complete too many transactions per month.
• Accessibility options: If you want to use a debit card or write physical checks from your money market account, choose an institution that offers those benefits.

Taking the time to compare rates and terms at several banks and credit unions gives you the best chance to find a money market account that fits your financial situation.

The Bottom Line

If you’re looking for a savings account that offers a solid interest rate and easy access to your funds, a money market account can be an excellent choice. MMAs typically offer a higher interest rate than traditional savings accounts, but they have more restrictions than checking accounts. Don’t forget to check if the money market account you’re considering has fees. Some do, although you may be able to have them waived by keeping enough money in your account.

FAQ: Money Market Accounts

The biggest difference between a savings account and a money market account is the way you can access the funds. Most money market accounts allow you to write checks and use a debit card. Additionally, the interest rate for a money market account is typically higher than a savings account.

Money market accounts are federally insured up to $250,000. If you open a money market account at a bank, your deposit is insured by the FDIC. If you open a money market account at a credit union, your deposit is insured by the NCUA.

Yes. Because they’re federally insured, money market accounts are generally considered a safe option for storing liquid cash. Unlike the similarly named money market mutual funds, MMAs are savings accounts, not investment products, so they have a lower level of risk.

Editor’s Note: Parts of this story were auto-populated using data from Curinos, a research firm that collects data from more than 3,600 banks and credit unions. For more details on how we compile daily rate data, check out our methodology here.

If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides.com .