Personal Finance

What is Money Market Account? How it Works and Its Benefits

A money market account is a type of savings account that offers higher interest rates and more flexibility than a traditional savings account. Money market accounts allow easy access to your funds while also earning interest, making them a useful option for short-term savings goals.

How Does a Money Market Account Work?

A money market account works similarly to a savings account in that it is an FDIC insured deposit account that pays interest. However, money market accounts have some key features that set them apart:

  • Higher interest rates – Money market accounts tend to pay significantly higher interest rates than regular savings accounts. Current average rates are around 0.62% APY for money market accounts versus 0.13% APY for savings accounts.
  • Check writing – Many money market accounts allow you to write checks off the account, giving you easy access to your funds.
  • Debit card – Money market accounts often come with an ATM/debit card for withdrawals and purchases.
  • Limited withdrawals – Banks may restrict withdrawals and transfers from a money market account to 6 per month. After that, an excess activity fee may apply.
  • Minimum balance – A minimum opening deposit or balance may be required to avoid monthly service fees. This varies by bank but averages around $2,500.

So in summary, a money market account allows you to earn interest like a savings account but with the convenience of accessing funds directly via checks or debit card. Just be aware of any transaction limits or balance requirements specific to your account.

Top Benefits of Money Market Accounts

There are several key benefits that make money market accounts a useful savings vehicle:

Higher Interest Rates

The main appeal of money market accounts is the ability to earn significantly higher interest rates than regular savings accounts. Current average yields are over 4 times higher. This allows your money to grow faster.

FDIC Insured

Money market accounts at banks are insured by the FDIC up to $250,000 per depositor, making them just as safe as savings accounts. Credit union money market accounts have NCUA insurance.

Easy Access to Funds

With check-writing capabilities and debit card access, money market accounts offer easy access to your funds which isn’t always the case with other interest earning accounts like CDs. This makes them handy for short-term needs.

Flexible Deposits

You can add funds to a money market account at any time. This allows you to grow your balance steadily when able to make deposits. Some accounts have no minimum deposit.

Limited Risk

While money market accounts don’t earn as much as investing, there is also very little risk involved since your deposits are FDIC insured. Money market accounts offer a nice balance of return versus risk.

Drawbacks of Money Market Accounts to Consider

While very useful, money market accounts also have some potential downsides to factor in:

  • Lower rates than CDs – While better than savings accounts, CDs may offer even higher fixed rates for locking up funds.
  • Variable rates – Money market account rates fluctuate so your return is not fixed like a CD.
  • Limited withdrawals – Banks may restrict convenient monthly transfers and withdrawals.
  • Minimum balances – Falling below a minimum balance requirement can result in monthly fees.
  • Taxable gains – Interest earned is considered taxable income.

Money Market Account vs Savings Account

The money market accounts share many similarities with savings accounts but have some key differences:

Money Market Account

Savings Account

Typically pays higher interest ratesUsually pays lower interest rates
Often has check writing capabilitiesNo check writing features
May come with a debit cardNo debit card access
Withdrawals may be limited to 6 per monthNo legal limit on withdrawals
Often has minimum balance requirementsTypically no minimum balance
Interest rates can fluctuateInterest rates can fluctuate

As you can see, the main advantages a money market account has over a traditional savings account are the ability to directly access funds and earn higher rates. Just be aware of any transaction limits or balance requirements specific to your money market account.

Money Market Account vs Checking Account

A Money market account works as a hybrid between savings and checking accounts:

Money Market Account

Checking Account

Pays interest on balancesTypically pays no or very low interest
Federally insured by FDIC/NCUANot always federally insured
Withdrawals may be limitedUnlimited withdrawals
May charge monthly service feesUsually no monthly fees
Typically has a minimum balanceNo minimum balance
Offers debit card accessOffers debit card access
Allows check writingAllows check writing

The main benefit a checking account has over a money market account is no limits on withdrawals or transfers. But money market accounts offer the ability to earn interest while maintaining access to your funds.

Who is a Money Market Account Right For?

A money market account can be a good fit for:

  • Those with short-term savings goals – Since money market accounts allow easy access to funds, they work well for short-term goals where you need to withdraw money within a 1-3 years.
  • Emergency funds – The combination of high interest and easy access makes money market accounts a great place to keep 3-6 months’ worth of living expenses for emergencies.
  • Savers who want FDIC insurance – For those who prioritize the safety of their deposits, a money market account provides higher returns than savings with the security of FDIC insurance.
  • People who need some check/card access – If you want to earn interest on your savings but also need the flexibility to directly access funds, a money market account provides the perfect compromise.
  • Anyone with large enough balances to meet minimum requirements – Make sure you have enough in savings to meet a money market account’s minimum balance without incurring monthly fees.

How to Open a Money Market Account

Opening a money market account is easy and can typically be done online or at your local bank branch:

  1. Compare money market accounts – Shop around for the best interest rates, fees, and terms for your situation. Focus on accounts with high APY, low or no minimum balance, and free debit card.
  2. Gather required documents – Have your SSN, home address, phone number, and a government issued ID ready to open your account.
  3. Make your opening deposit – Have funds available to meet the account minimum opening deposit if required. Some accounts allow $0 to open.
  4. Fill out application – Apply for the money market account online or in person. Approval is usually instant.
  5. Link external accounts – Set up direct deposit or connect external accounts to transfer funds easily.
  6. Understand the terms – Review all fees, withdrawal limits, and other account terms so there are no surprises.

Once approved, you can start earning a competitive interest rate on your savings right away!

The Bottom Line

A money market account can be a great place to keep your savings if you want to earn higher interest rates than a regular savings account while maintaining access to your money. Just be sure to compare accounts and watch out for any minimum balance requirements or transaction limits specific to your chosen account. With their unique combination of liquidity and returns, money markets offer a compelling option for short-term savers.

Frequently Asked Questions

Are money market accounts safe?

Yes, money market accounts are very safe thanks to FDIC insurance which protects up to $250,000 per depositor at banks. Federal insurance through the NCUA also applies at credit unions.

Can a money market account act as my main bank account?

While you can access funds from a money market account with checks or debit card, withdrawals may be limited so it is best suited as a supplemental savings account rather than a main spending account. A checking account is better for everyday use.

What is the average interest rate on money market accounts?

Interest rates on money market accounts fluctuate but average around 0.62% APY as of August 2022. Rates are over 4 times higher than regular savings accounts. Top yielding accounts offer over 4% APY.

Are money market accounts good for long term savings?

Money market accounts are better suited for short term savings needs of 1-3 years. For long term goals, investing or retirement accounts often provide better returns. But money market accounts are a smart parking spot for immediate savings needs.

Can you lose money in a money market account?

No, you cannot lose money in an FDIC insured money market account. The FDIC guarantees you will get your money back up to $250,000 if the bank fails. The value of your balance itself will not decrease unless you make withdrawals.

Jim Collins
Jim Collins is a leading expert in savings accounts, offering profound insights into optimizing financial growth. With a keen understanding of insurance and policies, Jim provides invaluable guidance for securing a stable financial future.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button