Among the many benefits of a money market account is its ability to earn interest at a higher rate than most traditional savings accounts while letting you retain access to your cash when needed. In fact, many money markets actually come with check-writing privileges or a debit card to allow easy access to the account. Unfortunately, this appears as both a money market account pros and cons entry. Because your funds are more easily accessible, the rate of return, or annual percentage yield, is not as robust as long-term investment options like multi-year CDs. This makes money markets an ideal savings opportunity for early savers without massive cash flow.
Advantages of Money Market Accounts
Higher APY than traditional savings accounts
One of the greatest benefits of investing in a money market account versus a savings account is access to a higher annual percentage yield, or annual earnings, than a traditional savings account provides.
Monica Oden, former Treasurer for the LA Rural Letter Carriers Association, said money markets are a safe option for use when you may need to access funds several times a year for large payments.
“While money is in the account between payrolls or bill payments, it earns more compound interest. It is also FDIC insured at the bank, so it is safe for business or groups when you have a business account,” Oden said.
Money market accounts can lose money because it is considered an investment account by the federal government. However, most money market accounts use very low-risk investments to minimize the chance for losses. This includes placing money in other “safe” investments, such as certificates of deposit or U.S. Treasury bills. Outside of losses, the FDIC insurance does provide up to $250,000 in protection for all account types — personal or business — should your bank or financial institution fold.
Strategic investments help boost APY over a checking account or savings account in most instances. For example, a Synchrony Bank money market account provided an APY of 1.20% as of November 2019. At Capital One, a savings account provides a 0.80% APY in the same time period. Money markets compound interest daily, meaning your interest starts earning interest faster. Many savings accounts also compound daily, but some are on a weekly or monthly schedule.
Improved earnings are not universal, however. Several high-yield savings account options may provide an improved return. For example, the Synchrony high-yield savings option paid 1.80% in November 2019 while Ally offered 1.70%.
With a high-yield savings account, you would sacrifice check-writing privileges, but you could still use fund transfers to move money in a pinch. Because money markets are considered a deposit account by the FDIC, you must be able to access your money. However, you are limited to six transactions per month in a money market or savings account. After that, you will face added fees for withdrawals. With a money market, check-writing counts as a withdrawal. Some money markets, particularly those with high APYs or minimum balance requirements, limit access to easy fund tapping by restricting your money movement to transfers or direct withdrawals from your account.
Debit or ATM card
Much like check-writing privileges, not all money market accounts provide a debit or ATM card. If you have a high-yield account, you may find your options for tapping the cash restricted to an account-to-account transfer from the money market to checking. When both accounts are housed with one bank, transfers can happen instantly. If the money market and checking account are with separate institutions, you can expect at least a one business day delay and maybe longer.
Disadvantages of MMAs
Limited withdrawals or transactions per month
As stated above, money market accounts — and savings accounts — are limited to six total withdrawals per month. Checks written and funds transferred between your accounts online or over the phone all count as do pre-authorized bill payments set up as automatic transfers. These regulations are set by the Federal Reserve as Regulation D. If you exceed this total, you will face a penalty for each transaction over the limit. For example, Ally charges $10 per each additional transaction and will close a money market account if the limit is frequently passed.
It is important to note individual banks can set their own rules regarding the six-transaction rule and may charge for debit card swipes over a total of six. Always review policy before starting a money market. It only takes one $10 fee to wipe out months of interest earnings on a low-balance account.
Potential minimum deposit
Some money market accounts require a minimum deposit to launch. Others provide access to tiered interest rates with higher APYs provided for larger deposits. An additional class of money market known as the jumbo money market requires minimum deposits as high as $100,000 to provide enhanced returns. For example, Discover Bank offers money market accounts with a 1.55% APY for balances under $100,000. Balances over $100,000 earn 1.60%.
Other banks may allow you to deposit a smaller amount but charge a fee if a minimum is not held in the account. For example, Bank of America charges a $12 monthly fee if your money market savings balance dips below a minimum daily balance of $2,500 unless you hold additional accounts with the bank.
The Best Ways to Use a Money Market Account
A money market account is best used as part of a comprehensive savings strategy or to get started with savings. It is considered a short-term investment and should be utilized as such.
One strategy for beginning savers is to use a money market account to hold emergency funds, or the basic living expenses you may need to sustain yourself for three to six months. The liquidity of the account and the ability to make withdrawals mean that you can access your cash in a pinch but keep earning interest at a higher rate than your savings account provides.
When your savings start to grow, you may choose to keep core emergency funds, such as the first three months in a money market account and add a series of CDs with various terms, such as 3-months, 6-months, 9-months and 12-months into the mix to meet long-term financing needs in an extended period of unemployment. After an emergency fund exists, boost contributions to any employer-match retirement accounts or start an IRA to meet your long-term needs. Later, you may consider investing in stocks and bonds.
A money market account can also be used when you are stashing cash toward a specific goal, such as making a down payment on a home. The funds are tucked away and earning interest but remain easily accessible when you’re ready to cash out.
The Final Word
A money market account is a nice step up from a traditional savings account. When you start to seriously develop a saving habit and want to see your money earn more money for you, it is a solid option for obtaining the benefits of compound interest. After you establish an emergency fund or save enough for a short-term goal, avoid over-funding the money market and find new ways to make your money work for you through tax-advantaged savings or more high-yield investments.