What Is a Money Market Account?

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Point of Interest

A money market account is an interest-bearing account that combines the best parts of savings accounts and checking accounts into one.

What is a Money Market Account?

When you want to keep your money relatively liquid (easy to access), but you want to earn a higher interest rate, a money market account might be what you’re looking for. By definition, a money market account is an interest-bearing account held with a bank or credit union that has some limitations on withdrawals but generally provides better interest rates than a traditional savings account.

Banks and credit unions will use the funds in your money market account to invest in low-risk opportunities in other areas of the bank. While this may sound risky, it’s not. Your returns are guaranteed, and your principal — the money you put into the account — is safe. Money market accounts at top banks and credit unions are insured by the FDIC or NCUA up to $250,000. As long as your account balance doesn’t exceed a quarter million, it is backed by the federal government.

Generally, customers use money market accounts in place of traditional savings accounts to earn a higher rate of return. Some customers who make very few monthly transactions may use a money market account as their traditional checking account. Most money market accounts limit you to six transactions or withdrawals per month.

Pros

  • Higher interest rates available
  • May include debit card privileges
  • Federally insured

Cons

  • Higher daily minimum balance
  • Limited monthly transactions 
  • Monthly fees apply

How to choose the best money market account

When picking out a money market account, there are several significant factors to consider. It’s easy to compare accounts only by interest rates, but doing so paints an incomplete picture. There’s a lot more that goes into making an informed decision, and it’s even more important if you’re starting saving from a younger age

First, you need to look at the minimum account balance needed to open a money market account. If you can’t meet a bank or credit union’s minimum, then you’re going to have to wait or choose a different option. Remember, this is also the minimum that needs to stay in the account — you won’t be able to put the money in to get the account open and then immediately withdraw it.

Next, you’ll want to look at any associated fees with the money market account. Is there a fee when your balance drops too low? What does the financial institution charge for too many transactions during a billing cycle? Is there a cost when you use your ATM card to make a withdrawal? While you may not plan on incurring any of these fees, it’s always good to be aware of them just in case your situation changes.

Lastly, do take the time to look at the annual percentage yield rate. This is a metric that tells you exactly how much you can expect to make every year on your money market account. Higher will always be better.

Alternatives to money market accounts

High-yield savings

Some banks and credit unions offer high-yield savings accounts that may deliver higher APY rates than a money market account. While the two accounts share many of the same qualities, there is one major difference — the access you have to your money. High-yield savings accounts typically do not offer the ability to write checks like you can with a money market account.

Which is better for you? It depends on how you are looking to save. If you need the ability to write checks and a little extra liquidity, choose a money market account. If that doesn’t matter to you and your bank or credit union is offering higher APY rates on a high-yield savings account, that will be your better option.

Certificates of deposit

Savers looking to earn even higher rates of return may be interested in certificates of deposit. A CD is an investment account that you deposit money into and leave untouched for a fixed period of time. During that time, the bank uses your money for low-risk investments, just like with a money market account. In return for letting the bank use your money (untouched by you), you’ll usually see a much higher return on your investment.

CDs come in various term lengths from as short as a few months out to several decades. Unlike a money market account, you don’t get six transactions a month. If you touch your money early in a CD, you will incur an interest penalty. CDs are best for hands-off investors who can afford to be separated from their funds for an extended period of time.

When to use a money market account

Money market accounts may be a great fit for people looking to get a little extra out of their money in the bank (or credit union). The higher interest rates should be attractive to people with a little extra cash in the bank. Even if you’re saving for something in particular, a money market account can be a shorter-term solution to help you get there faster.

For example, let’s say your checking account balance never goes below $2,500 between your bills and your direct deposited paychecks. If your bank offers a money market account with a minimum balance of $1,500 and a higher interest rate than your current checking account, you should consider moving some of the funds in your checking account over to a money market. You will still have plenty of money in your checking to cover your bills, and you’ll be earning higher interest on the bulk of your funds.

Additionally, if you do ever need access to those funds, the money is accessible. If you had the funds in a CD, you’d be able to get to them but would incur a penalty. Money market accounts provide rewards without completely locking money away in case you need it unexpectedly.