If you have a substantial amount of cash saved in a traditional savings account, you may want to consider other options for storing your money. One option is to open a money market account, which often offers higher interest rates and more flexibility than a traditional savings account.
There are certain pros and cons with money market accounts, so it’s important to understand what it is and how it works. You just might find that your money can better work for you when it’s in a more growth-oriented account such as a money market account. Ready to learn more?
What is a money market?
The most appealing aspect of opening a money market account, particularly compared to a savings account, is that it typically offers a higher interest rate. However, most money market accounts offer several features of both savings and checking accounts, including debit card access, check-writing privileges, and ATM withdrawals.
Money market savings accounts are FDIC-insured up to $250,000, so they’re considered a low-risk way to store your money, just like a regular savings account. If you open an account through a credit union, your funds are similarly NCUA-insured by the National Credit Union Administration.
Depending on your financial institution, your interest can accrue daily, monthly, quarterly, or annually. The more frequent the accrual, the more money you’ll earn over time because of the effects of compounded interest.
Pros and Cons of Money Market Accounts
Money market accounts (MMAs) are a popular choice for savers looking to earn interest on their deposits while still maintaining access to their funds. However, like any financial product, MMAs have both advantages and disadvantages that you should consider before opening an account.
- Higher interest rates: One of the main advantages of money market accounts is that they generally offer higher interest rates than traditional savings accounts. This is because banks and credit unions use the funds deposited into MMAs to invest in short-term, low-risk securities such as certificates of deposit (CDs), government bonds, and commercial paper. The returns generated from these investments are then passed on to account holders in the form of higher interest rates.
- FDIC or NCUA insurance: Money market accounts are insured by the FDIC or NCUA up to $250,000 per depositor, per insured bank or credit union. This means that if the bank or credit union were to fail, the depositor’s funds would be protected up to the insured limit. Insurance provides peace of mind for savers who are concerned about the safety of their deposits.
- Easy access to funds: Unlike CDs, which require the depositor to lock up their funds for a set period of time, money market accounts offer more flexibility in terms of accessing funds. Most MMAs allow savers to make withdrawals or transfers up to a certain number per month without penalty. This makes MMAs a good choice for savers who need easy access to their funds for emergencies or unexpected expenses.
- Higher minimum deposit requirements: Money market accounts often have higher minimum deposit requirements than traditional savings accounts. This means that savers may need to deposit a larger sum of money upfront to open an MMA. However, some banks and credit unions may waive the minimum deposit requirement if the account holder agrees to make regular deposits into the account.
- Limited transactions: While money market accounts offer more flexibility than CDs, they still have limits on the number of transactions that can be made per month. Federal regulations limit the number of withdrawals or transfers from MMAs to six per month. If savers exceed this limit, they may be subject to fees or penalties.
- Lower interest rates than other investments: While money market accounts offer higher interest rates than traditional savings accounts, they typically offer lower rates than other short-term investments such as Treasury bills or municipal bonds. This means that savers who are looking to maximize their returns may need to consider other investment options.
How to Set Up a Money Market Account
To deposit cash into your money market account, you can use any method you use with traditional savings accounts, including electronic transfer. If your account is with a financial institution that has physical branches near you, you can also make cash and check deposits.
You will usually receive both a debit card and a checkbook linked to your money market account. This allows you to make withdrawals at your convenience. That is another benefit that savings accounts don’t typically offer.
This keeps your funds liquid, so you can quickly access them during a financial emergency. There are some limitations on how often you can make withdrawals, so keep reading to familiarize yourself with the restrictions that occur when you have a money market account.
Limitations of a Money Market Account
While money market accounts do offer a degree of flexibility, there are some restrictions as well. Most notably, you may not make more than six withdrawals each month. This is a federal rule, not one made up by the banks. You could receive a fine if you exceed this limit.
On top of that, you’ll start to receive formal warnings from your bank. If you continually exceed the withdrawal limit after being warned, the bank or credit union is eventually required to move your funds into a checking account, so be aware of your behavior and plan accordingly.
Another restriction imposed by some banks (but not necessarily all of them) is minimum balance requirements. Many banks require that you open a money market account with at least $10,000. On top of that, you may also be required to maintain a certain minimum balance threshold. If you don’t, you could again be subject to a fee from the bank or credit union.
If you don’t meet the minimum balance requirements to open a money market account but still want one, you may be able to pay a monthly fee to bypass the deposit minimum. Just check to make sure it’s worth it.
There’s no sense in paying an expensive fee that exceeds the interest you accrue each month. If that happens, you’re probably better off keeping your cash in a free savings account or other similar product. Take the time to do the calculations to know exactly how much you’re earning (or paying) to determine if a money market account makes financial sense for your funds.
Is a money market account right for you?
There are numerous factors involved in whether a money market account is right for you. Start by looking at your holistic financial picture. Do you have a healthy buffer in your checking account or other savings account?
Money market accounts are often used for savings that don’t need to be accessed regularly, so make sure you have cash stored somewhere if you need it more frequently. Once you start to save on a larger scale, you can consider opening a money market account.
Money Market Rates
Another thing to think about with money market accounts is how competitive the yield rate stands. Years ago, money market rates were much more competitive than a standard savings account. But today, interest rates across the board are extraordinarily low.
While this is great if you’re borrowing money, it’s not so great when you’re trying to save money and benefit from high-yield savings accounts. Many money market accounts today are below 1% and are oftentimes even less than that. It’s definitely worth some research to determine which banks and credit unions are currently offering better rates.
The bottom line is that money market accounts do have limitations. If you can’t meet the minimum threshold without paying a fee, or you need to withdraw your funds frequently throughout the month, you may want to look for another type of account.
But if you want to diversify your savings while still receiving a nominal return, then consider a money market account. It’s low-risk and easy to access, so you get that flexibility to make withdrawals when you need to — just not every day.
What are the best money market accounts for 2024?
Check out our in-depth guide to 2024‘s best money market accounts. There’s a great variety of banks and credit unions offering different minimum deposits and some of the most competitive APYs on the market. Here is a brief overview of each of our top picks to help get you started.
With no minimum deposit for a money market account from Sallie Mae, you can earn a 3.40% APY on your funds. They also have a slightly more flexible overdraft policy compared to other financial institutions.
Ally offers a money market account with 3.30% APY and daily compounding interest. And unlike most money market accounts, there’s no deposit minimum, no monthly fee, and the APY applies to all balance tiers.
Alternatives to Money Market Accounts
While a money market account can be a great savings tool, it’s smart to familiarize yourself with similar options. A savings account usually offers less interest than a money market account, but this isn’t always the case — it really depends on the financial institution.
A savings account doesn’t let you write checks as a money market account does, but you don’t generally need a minimum deposit. Both types of bank accounts are considered low risk and insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. They also have the same withdrawal restrictions of up to six times per month.
Another comparable product is a certificate of deposit, or CD. The savings rate with a CD is typically higher than that of a money market account, but here’s the catch: you have to commit to a certain time frame before withdrawing funds from a CD.
Unlike a money market account, you’ll receive a penalty for making a withdrawal from your CD before the term matures. You can choose your term length, typically lasting between six months and five years.
While placing funds in a CD could certainly be a part of your savings strategy, it’s not meant to replace liquid cash assets. You probably shouldn’t put any money in a CD that you would expect to need before the maturity date. But the longer term you commit to, the more interest you can expect to earn, so there are definitely merits involved as long as you have a holistic savings plan.
Money Market Accounts vs. Money Market Funds
These two financial products are actually entirely different, so be careful not to confuse a money market account (MMA) with a money market fund (MMF). While an MMA serves as a low-risk account for savings, an MMF is an investment in a mutual fund and is typically done through a broker.
While money market accounts are insured by the FDIC, money market funds are not. There’s no guarantee that you’ll even receive back your entire principal, let alone any earnings. Still, they are low-risk on the spectrum of investments, but there’s no financial safety net in terms of insurance.
So, what exactly do money market funds invest in? Most commonly, they focus on U.S. Treasury bills, commercial paper, and other short-term debt securities. These aren’t turbulent investments by any means, and they’re starting to see higher yields as the Federal Reserve begins to raise rates.
Like all savings vehicles these days, savers don’t see dramatic differences among many of these products. Whether you’re considering a money market account or anything else, be sure to check on exactly what terms the bank is offering, and don’t be afraid to shop around.
If you’ve been saving since before the recession of the mid-2000s, you might remember APYs that actually made you a decent return. But today’s markets are different as the country still sifts through economic recovery. For savers, that means taking a closer look at what kind of interest you can expect to receive.
It also means making sure you don’t actually end up losing money by paying hefty fees or tying up money in low-yield savings accounts with too many restrictions. In many cases, a money market account could be the next step up in your overall savings plan.