What Is a Money Market Account? 

Christopher Moser is an investment consultant for Northwestern Mutual.

When it comes to saving money—whether for an emergency fund, vacation fund or other short-term spending goals—where you choose to keep your money matters. Sure, you know that you shouldn’t just hide cash under your mattress, but that doesn’t mean you have to turn to a savings account.

In fact, you have a lot of different options about how and where you put your cash savings. One that you’ve probably heard of is a money market account.

Below, we take a closer look at money market accounts and how they work. We also walk through the benefits and drawbacks that come with these accounts before explaining some alternatives.

What is a money market account?

A money market account (MMA) is a special type of savings account, offered by banks, which allows you to earn interest on your money while also having some of the check-writing and debit card features typically associated with a checking account. So, you can think of a money market account almost as a checking/savings account hybrid.

Money market accounts have historically offered higher interest rates compared to regular savings accounts. But, thanks to the proliferation of high-yield savings accounts, the interest rates on savings and money market accounts today tend to be similar.

How does a money market account work?

Money market accounts work the same as any other type of savings account: You deposit money into the account and earn interest on it, allowing your money to grow and potentially compound over time. The “money market” involves banks, companies and governments. They borrow from one another and lend money to each other. The interest paid on those transactions is eventually passed along to the bank accounts of customers like you.

Because money market accounts may earn a higher interest than traditional savings accounts, they can be a good choice for people looking to boost their savings while still keeping easy access to their funds.

Can a money market account lose money?

No. Amounts up to $250,000 per depositor, per bank in a money market account are usually insured by the Federal Deposit Insurance Corporation (FDIC), so there’s virtually no risk of losing amounts up to that even if the bank that holds your account fails. Look for the FDIC sign at the bank’s website, or use the FDIC's BankFind tool.

It’s possible to use multiple accounts to insure higher amounts. For example, you and your spouse might have a joint money market account that is insured up to $250,000. And you could each have an individual account (even at the same bank), which would also be insured up to $250,000. So, your household would have three money market accounts at the same bank. Each would be insured up to $250,000.

When thinking about whether your money market account could lose money, keep in mind that your bank may charge fees and penalties. This could reduce the amount of interest your account earns—eating into your initial deposit if you don’t keep an eye on things.

Do money market accounts have minimum balances?

Yes. Most banks will require a minimum initial deposit to open your money market account. You’ll then need to keep a minimum balance from month to month to remain eligible for the account and avoid certain fees.

Minimums are set by each bank. They can range from as low as a few hundred dollars to as high as $10,000 or more. The average minimum is between $2,500 and $5,000.

Is a money market account the same thing as a money market fund?

No. While they sound similar, these two financial instruments are in fact very different.

A money market account is a type of FDIC-insured savings account. This means you don’t have to worry about losing amounts up to $250,000 that you deposit in an MMA.

But a money market fund (MMF) is a type of mutual fund offered by investment companies. While considered low risk, it is still possible to lose money you invest in an MMF, so money market funds typically offer a higher interest yield than money market accounts.

Benefits of a money market account

Offered by financial institutions like banks and credit unions, a money market account can be a great place to store money at a modest interest rate. An MMA offers both earning potential and easy access to your funds.

Higher interest rate than a traditional savings account

One of the main benefits of a money market account is that it might offer a higher annual percentage yield (APY) than a traditional savings or interest-bearing checking account. According to the FDIC, the national average interest rate as of June 17, 2024, was 0.67 percent for money market accounts compared to 0.45 percent for traditional savings accounts and 0.08 percent for interest-bearing checking accounts.

But when interest rates rise, you’ll often see banks offer higher rates on high-yield savings accounts and money market accounts, sometimes at 0.5 percent or higher, to attract new customers. It’s smart to shop around for the best yield.

Access to your money

There are other accounts similar to a money market account, but you may not get the same balance of access and growth. When you deposit money into a certificate of deposit (CD), you’ve effectively locked up your money for a while. Usually, the longer the term, the more interest you’ll earn—but early withdrawals will result in a penalty. And with a high-yield savings account, you may be able to save at a similar interest rate, but you won’t get the same check-writing and debit-card privileges as with a money market account.

FDIC-insured

Money market accounts are usually insured by the FDIC. If the financial institution fails, the agency will refund up to $250,000 per account holder.

Downsides of a money market account

Money market accounts can have their drawbacks, including these:

Fluctuating interest rates

While money market accounts typically offer higher interest rates than traditional savings accounts, these rates aren’t set in stone. Financial institutions can change their APYs. Rates often fluctuate along with federal interest rates, so the rate you signed up with isn’t likely to be the rate that continues through the life of your account. In a low-rate environment, a money market account may not earn as much.

Potentially high minimum balance and fees

Every financial institution is different. Some may impose a minimum opening deposit or require account holders to maintain a minimum ongoing balance to earn the advertised APY. One workaround is to search for a money market account that has a low minimum balance requirement (or none at all). You’ll also want to understand whether the bank imposes fees if your balance dips below a certain point.

Limited transactions

While you can typically withdraw funds as frequently as you like from a checking account, money market accounts will usually limit your monthly withdrawals or payments made by debit card, check, electronic transfer or draft. Some money market providers might have even lower limits, so be sure to read the fine print before opening your account.

Money market accounts vs. other types of accounts

Here’s how money market accounts measure up against other types of savings vehicles.

Savings accounts

Savings accounts usually earn a much lower APY than money market accounts and aren’t quite as flexible. A high-yield savings account may offer a similar or even higher rate, but remember that it may offer less flexibility for getting your money.

Checking accounts

Checking accounts are designed to hold cash you plan on using in the short term for things like everyday spending and paying bills, so basic checking accounts typically don’t offer an APY. You can open an interest-bearing checking account, but these accounts usually offer a much lower rate than what you could get from a money market account. Like money market accounts, checking accounts may also charge monthly maintenance fees or fees for going below a minimum balance. So consider how much money to keep in a checking account.

CDs

With certificates of deposit, longer terms usually mean you’ll earn a higher interest rate on your money, so it’s possible to earn more by putting your money into a CD than you would with a money market account. But you’ll get penalized if you access your money before the term ends. If you are considering saving through CDs, consider setting up a CD ladder, which can make it easier to access your money if and when you need it.

Is a money market account right for me?

It depends on your financial goals. A money market account might be ideal for an emergency fund or for money you’re setting aside for a near-term goal. But pay attention to interest rates and minimum balance requirements when searching for a money market account.

However, depending on what you’re saving for and when you need to access your money, you may see better growth through other types of savings or investment vehicles. If you have multiple goals you’re trying to save for, talk them over with your financial advisor. They can help you determine the best way to save while considering your entire financial plan.