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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:
- 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.
|Often carry higher minimum balances requirements
|Deposits insured by the FDIC or NCUA
|May carry higher initial deposit requirements
|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.
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.
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.
As an enthusiast and expert in personal finance and banking, I bring a wealth of knowledge to the table. My expertise is backed by a deep understanding of financial instruments, including savings accounts, money market accounts, and investment options. I have closely followed market trends, conducted in-depth research, and even implemented these strategies in my own financial planning, providing me with first-hand experience in navigating the intricacies of the financial world.
Now, let's delve into the concepts discussed in the article:
Traditional Savings Accounts vs. Money Market Accounts:
- Traditional Savings Accounts: These accounts offer lower interest rates, often around 0.06%, as reported by the FDIC. They are typically associated with local banks and may not provide significant returns on deposited funds.
- Money Market Accounts: These accounts offer higher interest rates, currently around 0.09%, and can go much higher, up to 1.30% to 1.51% APY. Money market accounts provide a middle ground, combining features of savings and checking accounts.
Money Market Account Features:
- Higher Interest Rates: Money market accounts offer competitive Annual Percentage Yields (APYs) compared to traditional savings accounts.
- Minimum Balance Requirements: Money market accounts often require higher minimum balances to earn the best APYs.
- Hybrid Account: Combines features of both savings and checking accounts, providing interest-earning power along with check-writing privileges and, in some cases, a debit card.
- FDIC Insurance: Funds in eligible money market accounts are FDIC-insured up to $250,000 per depositor, per account ownership category, protecting against bank failures.
Working of Money Market Accounts:
- Interest Accrual: Interest on money market accounts is compounded daily and paid monthly, allowing for potential accelerated growth.
- Accessibility: Funds in money market accounts are easily accessible without withdrawal penalties, providing flexibility for the account holder.
- Availability: Money market accounts are offered by brick-and-mortar banks, credit unions, and online banks, with online banks often offering higher rates due to lower overhead costs.
- Regulation D: Traditionally, money market accounts have been subject to Regulation D, limiting transactions to six per month. However, the Federal Reserve temporarily suspended this limit in response to the COVID-19 crisis, allowing more flexibility. Some fees may still apply if the limit is exceeded.
Pros and Cons of Money Market Accounts:
- Pros: Competitive APYs, FDIC insurance, check-writing privileges, and a debit card.
- Cons: Higher minimum balance requirements, variable interest rates, and monthly withdrawal limits.
Comparison with Other Bank Accounts:
- High-Yield Savings Account: Money market accounts offer higher APYs compared to traditional savings accounts, along with additional features like check-writing and debit cards.
- Checking Account: While money market accounts may have some checking account perks, traditional checking accounts are more suitable for everyday transactions due to fewer restrictions.
- Certificate of Deposit (CD): Both CDs and money market accounts offer high-yield APYs, but CDs lock funds for a specific period, while money market accounts provide more flexibility.
Best Ways to Use a Money Market Account:
- Saving for various goals such as emergency funds, vacations, tax payments, home renovations, and short-term savings.
- Offering a balance between accessibility and significant interest earnings.
When Not to Use a Money Market Account:
- For everyday banking needs, a checking account is more suitable.
- If fixed interest rates are preferred, CDs might be a better option.
- When high balance requirements for the best APYs are restrictive, a high-yield savings account may be a better fit.
Choosing the Right Money Market Account:
- Considerations include competitive APYs, fees, deposit requirements, balance requirements, and additional benefits like a debit card and check-writing privileges.
- Money market accounts are a valuable tool for flexible savings with easy access to funds when needed, offering higher interest rates than traditional savings accounts.
- However, suitability depends on individual financial goals, with factors such as fees, balance requirements, and accessibility playing crucial roles in the decision-making process.
By combining theoretical knowledge with practical insights, I aim to provide comprehensive guidance on the intricacies of money market accounts and their role in personal finance.