As a consumer, you have many choices when it comes to banking, especially when it comes to where to put your cash savings. One of these is a money market account. A money market account essentially functions as a flexible savings account that allows you to earn interest on your money with some check-writing and debit features. Think of a money market account almost like a checking/savings account hybrid.
Note that a money market account is different from a money market mutual fund, which is a type of mutual fund that invests in low-risk debt securities.
Let’s unpack how a money market account works, along with its benefits and drawbacks.
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 save for near-term financial goals, like saving for a down payment on a home or your next family vacation, because it offers both earning potential and easy access to your funds.
Higher interest rate than a traditional savings account
One of the main draws of a money market account is that it generally offers 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 May 16, 2022, was 0.07 percent for a traditional savings account and 0.03 percent on interest checking accounts, versus 0.08 percent for money market 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 .5 percent or higher, to attract new customers. With interest rates on the rise, it’s wise to shop around for the most competitive money market APY.
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 predetermined amount of time. In most cases, 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.
Money market accounts are insured by the FDIC. If the financial institution faces difficulty or fails, the federal government will insure your assets up to $250,000 per account holder.
What to look out for when choosing a money market account
Money market accounts do have their drawbacks. Financial institutions can change their APYs, and they often change 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. Below are a few other potential disadvantages to consider.
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 clarify if the bank imposes fees if your balance dips below a certain point.
While you can typically withdraw funds as frequently as you like from a checking account, money market accounts will limit you to six 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 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 rate but, as mentioned previously, it may offer less flexibility when it comes to accessing your money.
Checking accounts are geared 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, typically at a lower rate than what is offered by a money market account, but you may need to a minimum amount to open or maintain the account. Checking accounts may also charge monthly maintenance fees or fees for going below a minimum balance.
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 putting your money into a CD than through a money market account. However, you won’t be able to access your money before the term ends without penalties.
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. Again, 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, consider discussing those goals with a financial advisor so that they can help you determine the best way to save in the context of a larger financial plan.