What Is A Money Market Account And How Does It Work? (2024)

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If you’ve ever opened a traditional savings account at a local bank, you probably realized quickly that it takes a lot of money and time to earn much in the way of interest.

Money market accounts present a way for consumers to accelerate interest-earning through potentially higher-yielding rates. The national average interest rate for savings accounts under $100,000 as reported by the FDIC is currently just 0.06%, while money market accounts sit at 0.09%. That doesn’t seem like much, but keep in mind that the best money market accounts offer up to 1.30% to 1.51% APY.

Here’s a closer look at money market accounts, how they compare to other bank accounts and why they might be the right banking solution for you.

What Is a Money Market Account?

A money market account is a type of account that tends to offer a higher interest rate than traditional savings accounts. Typically, money market accounts also have higher minimum balance requirements.

Think of a money market account as a hybrid account, often mixing the best features from both savings and checking accounts. You have the interest-earning power of a high-yield savings account, plus many money market accounts come with a debit card and check-writing privileges.

Money market accounts let you grow your money more quickly, but without the uncertainty tied to investment accounts. Eligible money market accounts are FDIC-insured up to $250,000 per depositor, for each account ownership category, so your funds are protected in the event of a bank failure.

Not meant for use as an everyday spending account, money market accounts offer some flexibility so you can access funds when you need them, but they also are subject to federal transaction limits.

How Do Money Market Accounts Work?

Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly. Money kept in money market accounts is accessible when you need it, without incurring a withdrawal penalty, as you might with a certificate of deposit.

Money market accounts are available from brick-and-mortar banks and credit unions, as well as many online banks. Online banks may offer higher rates because they have less overhead than traditional banks.

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Transaction Limits for Money Market Accounts

Traditionally, money market accounts are limited to just six transfers or withdrawals per month (or statement cycle) thanks to Regulation D. Limited transaction may include:

  • Check-writing
  • Debit card purchases
  • Transfers from one account to another

However, in response to the COVID-19 crisis, and to make it easier for consumers to tap their savings, in April 2020 the Federal Reserve announced an interim final rule to suspend the Regulation D limit on monthly money market account withdrawals. However, banks and credit unions may still impose a fee if the usual monthly limit is exceeded.

Pros and Cons of Money Market Accounts

A money market account can be a solid savings choice depending on your banking needs, but it may not be suitable for everyone. Consider the following pros and cons when deciding whether to park your money in a money market account.

ProsCons
Competitive APYs Often carry higher minimum balances requirements
Deposits insured by the FDIC or NCUA May carry higher initial deposit requirements
Check-writing privileges Variable interest rate
May include a debit card Monthly withdrawal limits

How a Money Market Account Compares to Other Bank Accounts

Money market accounts offer slightly different features than those found with other bank accounts. Here’s a look at how they compare to traditional bank accounts offered by most full-service banks.

High-Yield Savings Account

A money market account is not the same as the traditional savings account you’re probably used to. The biggest difference between the two accounts is that money market accounts typically offer a higher Annual Percentage Yield (APY), especially the best money market accounts offered by online banks. And you usually will have check-writing privileges and a debit card.

Checking Account

Traditional checking accounts are for everyday transactions. Money market accounts don’t work that way since they traditionally have been subject to monthly transaction limits. Customers who want to keep their money accessible for day-to-day transactions should stick with a checking account for those funds. Some money market accounts come with checking account perks, like debit cards for ATM access and check-writing privileges.

Again, the interest earned by money market accounts is a major difference between the accounts. The majority of checking accounts aren’t interest-bearing, and the ones that earn minimal APYs compared to many money market accounts.

Certificate of Deposit (CD)

CDs can be comparable to money market accounts in terms of interest rates. Both may offer high-yield APY. The difference is that CDs require you to leave your funds untouched for a specific period, ranging from as little as one month to as long as five or 10 years. Most CDs don’t allow you to withdraw funds early without being charged a penalty.

Another difference between CDs and money market accounts are the type of interest rate they each have. When you open a CD, you lock in a fixed interest rate for the entire CD term. Money market accounts have variable APYs, which means that the rate can rise or fall on any given day.

Money market accounts often reserve the highest rates for higher balances, while the highest CD rates tend to be awarded for longer CD terms.

Both accounts are low-risk investments because they offer guaranteed earnings and are FDIC-insured up to a limit.

Best Ways to Use a Money Market Account

Money market accounts are a great vehicle to use for pursuing both short-term and long-term savings goals. They allow you to separate specific money from your everyday bank account to save for the future. Money market accounts are an excellent bank account to use for:

  • Emergency funds
  • Wedding expenses
  • Vacation funds
  • Tax payments
  • Home renovation projects
  • Saving for a new car
  • Retirement savings
  • Other short-term savings goals

There’s no shortage of uses for a money market account. Plus, your money is readily accessible if you find you need it.

When You Shouldn’t Use A Money Market Account

While money market accounts are an excellent vehicle for saving money, they are not the best account for every circumstance. Here are some instances where it might make more sense to look at other banking solutions:

  • Everyday banking. If you need a bank account that is good for everyday use, a checking account is a better fit. Transaction limits make money market accounts better as savings vehicles, with occasional use elsewhere as needed.
  • Fixed rates. Money market accounts have variable interest rates that can fluctuate daily. If you’re looking for certainty that your money will always earn a higher rate, CDs can be a better option, especially if you can afford to leave your money untouched for a set period of time.
  • Balance requirements. Some money market accounts require significant balances to earn the highest APYs, which may limit some people from earning enough interest to make it worth it. In that case, a high-yield savings account with a lower balance requirement might be a better fit.

How to Choose the Right Money Market Account

If you think a money market account is right for you, there are certain criteria you should consider when choosing which account to open. Here are some features to keep in mind as you look for the right money market account:

  • Rates. The main draw of money market accounts is the chance to earn significant interest over time. Find an account that offers a competitive APY.
  • Fees. It’s not all about the rates, though. Some banks charge monthly maintenance fees on their money market accounts. Others have waivable fees if you meet certain criteria, like minimum balance requirements. Having to pay monthly fees can negate much of the earning you opened up the account for in the first place.
  • Deposit requirement. Just as with other bank accounts, banks have their own deposit requirements for opening a money market account. Make sure to check what’s required before opening a new account.
  • Balance requirements. You also want to find a money market account with balance requirements you’re able to meet in order to take advantage of those competitive rates.
  • Additional benefits. While a free debit card and check-writing privileges aren’t required, they are nice perks that can make a difference when comparing similar account offerings.

Do your homework to help ensure you end up with the best money market account for your savings and banking needs.

Is a Money Market Account Right for You?

A money market account is a means to an end. If you’re looking for a way to set aside significant money to reach spending goals, money market accounts are a great option. If you want the flexibility of an account for everyday use, it’s not the best choice because of the traditional monthly transaction limits.

Take time to consider your personal and financial goals to see if they align with what money market accounts offer. For many people, they are an excellent and safe option for socking away money for a while to earn interest.

Bottom Line

For flexible savings and easy access to funds when needed, it’s hard to argue against a money market account. You can earn a higher interest rate than you would with a traditional savings account all while keeping your money easily accessible.

Still, money market accounts aren’t a good fit for everyone. Some MMAs require paying high monthly fees or making higher initial deposits than other bank accounts. Many money market accounts carry withdrawal limits, so note any restrictions before opening an account to ensure it matches your banking needs.

Money Market Account FAQs

Are money market accounts safe?

Yes, your money is safe in a money market account. Accounts through banks are FDIC-insured up to $250,000 per depositor, per account ownership category, like other bank accounts. Money market accounts through credit unions are insured by the National Credit Union Association (NCUA) for up to $250,000 per depositor, per account ownership category.

What is the interest rate on a money market account?

According to FDIC data, the national average interest rate for money market accounts is currently 0.23% APY for accounts with balances under $100,000. Many online banks and credit unions offer money market accounts with interest rates of 3% or higher. The interest rate on money market accounts is typically higher than a traditional savings account.

What is the minimum balance for a money market account?

It depends on the financial institution. Banks typically require customers to keep a higher minimum monthly balance with money market accounts than savings or checking accounts. And some banks charge monthly maintenance fees if you fail to meet minimum balance requirements. Paying a monthly fee can negate any interest earned on the account, but not all banks charge fees or carry balance requirements.

What’s the difference between a money market account and a money market fund?

A money market fund is a type of investment account. It’s often referred to as a money market mutual fund. It’s a type of low-risk investment that typically invests in high-quality securities. The best money market mutual funds offer a flexible investment solution for your money while earning interest.

How much money do I need to open a money market account?

The minimum opening deposit amount varies, depending on the bank. The CIT Bank Money Market Account, for example, only requires an initial deposit of $100 to open an account, whereas opening the Northern Bank Direct Money Market Account requires a $5,000 initial deposit.

I am an expert and enthusiast assistant. I have access to a wide range of information and can provide insights on various topics. I can help answer your questions and provide information on money market accounts, their features, how they work, and how they compare to other bank accounts.

Money Market Accounts: An Overview

A money market account is a type of bank account that typically offers a higher interest rate compared to traditional savings accounts. These accounts often require higher minimum balance requirements. Money market accounts combine features from both savings and checking accounts, providing the interest-earning power of a high-yield savings account along with check-writing privileges and a debit card.

Money market accounts allow you to grow your money more quickly while avoiding the uncertainty associated with investment accounts. They are FDIC-insured up to $250,000 per depositor, per account ownership category, providing protection in the event of a bank failure. While money market accounts offer some flexibility in accessing funds, they are subject to federal transaction limits.

How Money Market Accounts Work

Money market accounts work similarly to other deposit accounts, such as savings accounts. When you deposit funds into a money market account, you earn interest on those funds. Interest on money market accounts is typically compounded daily and paid monthly. Unlike certificates of deposit (CDs), money market accounts allow you to access your funds without incurring a withdrawal penalty.

Money market accounts are available from brick-and-mortar banks, credit unions, and online banks. Online banks may offer higher rates due to lower overhead costs compared to traditional banks.

Money Market Accounts vs. Other Bank Accounts

Money market accounts offer some unique features compared to other bank accounts. Here's a comparison of money market accounts with other common bank accounts:

High-Yield Savings Account: Money market accounts typically offer a higher Annual Percentage Yield (APY) compared to traditional savings accounts. They also provide check-writing privileges and a debit card.

Checking Account: Money market accounts have traditionally been subject to monthly transaction limits, making them less suitable for everyday transactions. However, some money market accounts offer checking account perks, such as debit cards and check-writing privileges.

Certificate of Deposit (CD): Money market accounts and CDs can both offer high-yield APYs. However, CDs require you to leave your funds untouched for a specific period, while money market accounts allow more flexibility in accessing funds. CDs also have fixed interest rates for the entire term, while money market accounts have variable APYs.

Pros and Cons of Money Market Accounts

Money market accounts have their advantages and disadvantages. Here are some pros and cons to consider:

Pros:

  • Competitive APYs
  • Deposits insured by the FDIC or NCUA
  • Check-writing privileges
  • Flexibility in accessing funds

Cons:

  • Often carry higher minimum balance requirements
  • May carry higher initial deposit requirements
  • Variable interest rates
  • Monthly withdrawal limits

Best Ways to Use a Money Market Account

Money market accounts can be used for various savings goals, including:

  • Emergency funds
  • Wedding expenses
  • Vacation funds
  • Tax payments
  • Home renovation projects
  • Saving for a new car
  • Retirement savings
  • Other short-term savings goals

Money market accounts provide a way to separate specific funds from your everyday bank account and earn interest while keeping the money readily accessible.

When Not to Use a Money Market Account

While money market accounts can be a great savings vehicle, they may not be the best choice in every situation. Here are some instances where other banking solutions may be more suitable:

  • Everyday banking: If you need an account for everyday use, a checking account is a better fit.
  • Fixed rates: If you prefer certainty in earning a higher rate, CDs may be a better option.
  • Balance requirements: Some money market accounts require significant balances to earn the highest APYs, which may limit some people from earning enough interest. In such cases, a high-yield savings account with a lower balance requirement might be a better fit.

Choosing the Right Money Market Account

When choosing a money market account, consider the following criteria:

  • Rates: Look for an account that offers a competitive APY.
  • Fees: Check for monthly maintenance fees and whether they can be waived.
  • Deposit requirement: Be aware of the minimum deposit required to open an account.
  • Balance requirements: Find an account with balance requirements that you can meet to take advantage of competitive rates.
  • Additional benefits: Consider perks like a free debit card and check-writing privileges.

Doing your research and considering these factors will help you find the best money market account for your savings and banking needs.

Money Market Account FAQs

Here are answers to some frequently asked questions about money market accounts:

Are money market accounts safe? Yes, money market accounts are safe. They are FDIC-insured up to $250,000 per depositor, per account ownership category for accounts through banks. Accounts through credit unions are insured by the National Credit Union Association (NCUA) for the same amount.

What is the interest rate on a money market account? The national average interest rate for money market accounts is currently around 0.23% APY for accounts with balances under $100,000. Many online banks and credit unions offer money market accounts with interest rates of 3% or higher.

What is the minimum balance for a money market account? The minimum balance requirement varies depending on the financial institution. Banks typically require higher minimum balances for money market accounts compared to savings or checking accounts. Some banks also charge monthly maintenance fees if the minimum balance requirements are not met.

What's the difference between a money market account and a money market fund? A money market account is a type of bank account, while a money market fund is a type of investment account. Money market funds typically invest in high-quality securities and offer a flexible investment solution while earning interest.

How much money do I need to open a money market account? The minimum opening deposit amount varies depending on the bank. Some banks may require as little as $100, while others may require higher initial deposits.

I hope this information helps you understand money market accounts and their features. If you have any more questions, feel free to ask!

What Is A Money Market Account And How Does It Work? (2024)
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