What Is A Money Market Account And How Does It Work?

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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 0.46%, while money market accounts sit at 0.63%. That

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 0.46%, while money market accounts sit at 0.63%. That doesn’t seem like much, but keep in mind that the best money market accounts offer up to 5.00% APY or higher.

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.

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:

  • Check-writing
  • 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.

History of Money Market Accounts

Money market accounts were created by the Garn-St. Germain Act of 1982. This law aimed to address increasing inflation and encourage Americans to save by allowing financial institutions to offer better interest rates on consumer deposits. Following the Depository Institutions Deregulation Act of 1980, it continued to phase out deposit interest ceilings and allowed new account types to be created—including money market deposit accounts (MMDAs).

MMDAs were designed to compete with money market mutual funds, a type of investment account that threatened banks’ profits and deposits because consumers chose them for their higher rates. MMDAs were authorized to have no caps on rates, no maturity terms, deposit minimums of at least $2,500 and up to six monthly transfers. By 1986, the required minimum deposit on MMDAs fell to zero, though many accounts still impose their own minimums today.

Modern money market accounts, which often drop the term “deposit” from their name, are still used for saving and tend to offer interest rates that are close to top CDs and high-yield savings accounts.

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 of money market accounts when deciding whether to park your money in a money market account.

ProsCons
Competitive APYs
Often carry higher minimum balances requirements
Deposits insured by the FDIC or NCUA
May carry higher initial deposit requirements
Check-writing privileges
Variable interest rate
May include a debit card
Monthly withdrawal limits

How To Open a Money Market Account

Here are the steps you’ll need to take to open a money market account:

  1. Compare rates. Before choosing a money market account, you’ll first want to compare rates at multiple banks to find the best money market account for your needs and goals.
  2. Apply. Submit an application by providing personal information and identifying documents, including your name, address, occupation and Social Security number.
  3. Deposit funds. You can often fund a money market account with an internal or external electronic transfer, direct deposit transfer or check. Some accounts also accept cash deposits.

Once your money market account is approved, you can register for online and mobile banking if you haven’t already. Checks or debit cards you request often arrive within a couple of weeks.

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.

Checking Account

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 requirements. Money market accounts often have minimum deposit and balance requirements, and these may be higher than those found with other deposit savings accounts. Always check the minimums needed to waive fees and earn interest.
  • 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.

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