Mar 14, 2024
by Kit Pulliam; edited by Sophia Acevedo, CEPF
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Developing a strong financial plan is important. But knowing where to put your money can be challenging, especially when you don't have savings goals mind.
Money market accounts are a great place to put your money because they offer great interest rates without sacrificing security or liquidity. We've provided a rundown on what money market accounts are, their pros and cons, and what to consider when you're thinking of opening one.
Introduction to money market accounts
Definition and overview
Money market accounts are a type of deposit account. Like savings accounts, they offer you interest on any money you put into the account. However, money market accounts generally give you a higher rate.
Banks can offer you this interest rate because they invest the funds you put in your money market account.
"They basically pool together money from multiple investors, and then they invest in high-quality, short-term securities," says Bobbi Rebell, CFP, founder and CEO of Financial Wellness Strategies.
Unlike many investments, money market accounts are insured by the FDIC for banks or the NCUA for credit unions. This means that there isn't any risk involved for accounts holding up to $250,000 per depositor.
How money market accounts differ from savings and checking accounts
While money market accounts are similar to savings and checking accounts in a lot of ways, there are a few ways in which they differ.
The biggest difference between checking accounts and money market accounts is the interest rate. While there are checking accounts that pay interest, most don't, and those that do usually don't have great rates. In comparison, money market accounts offer good interest rates, and the best money market accounts can have interest rates over 5% APY.
On the flip side, money market accounts sometimes put limits on how frequently you can withdraw money from them, while checking accounts don't usually have those limits.
The big difference between money market accounts versus saving accounts is liquidity and interest rate. Many money market accounts give you paper checks, ATM cards, or other easy ways to withdraw money from your account. While there are savings accounts with debit cards or ATM cards, most don't offer them. Money market accounts also generally offer higher rates than savings accounts, although exact rates vary by bank.
Benefits of money market accounts
Higher interest rates
One of the major benefits of opening a money market account is that they tend to offer higher interest rates than traditional savings accounts, although you might find similar rates offered by online banks. In exchange, they usually require you to put more money into them than a savings account would. "In order to get the best rates, you might have to have a higher minimum deposit," says Rebell.
You'll want to check the bank you're interested in to make sure you meet their minimum deposit requirements.
Easy access to funds
Money market accounts are significantly more liquid than investments or CDs. They can also provide slightly easier access to your funds than savings accounts, although not every money market account does.
Money market accounts frequently come with ATM cards, debit cards, paper checks, or other ways to access your money that savings accounts don't generally come with. Keep in mind, though, that money market accounts generally put limitations on how often you can pull money out of your account. If you're looking for an account that offers maximum ease of access, a checking account might be a better fit.
Safety and security
Money market accounts are significantly safer than investing because even safe investments can result in you losing money. Money market accounts, on the other hand, are insured, so your money is protected by the FDIC and NCUA, up to $250,000 per depositor.
Some banks even offer insurance that covers more funds, so check with your bank if you're planning on putting a significant amount of cash in your money market account.
How money market accounts work
Interest rates and how they're calculated
Interest rates for deposit accounts, such as savings accounts and money market accounts, are different from bank to bank. They depend on things like current Federal Reserve rates, market conditions, and individual bank policies.
Additionally, the rate you get on your money market account is frequently dependent on how much money you have in your account. Interest rates for money market accounts frequently come in tiers.
For example, your money market account might offer you a 3% annual percentage yield if you have between $1,000 and $9,999 in your account, a 3.25% APY if you have between $10,000 to $24,999, and a 3.5% APY if you have $25,000 or above in your account. The more you put in your account, the higher your rate becomes.
Check with the bank or credit union you want to open an account with to see if you qualify for the rate you're interested in.
Minimum balance requirements
Money market accounts tend to have minimum balance requirements that are higher than other depository accounts. If the money in your account drops below that minimum balance requirement, you might have to pay a service fee.
In addition, because many money market accounts have tiered interest rates based on how much money you have in your account, your interest rate might drop if you remove money from your account, even if you're still above the minimum balance requirement.
Because of this, when planning how to budget your money, it's important to think ahead of time about how much money you have to put in your account, as well as whether it's feasible for you to keep that much money in your account going forward.
Fees and service charges
All depository accounts can have fees, such as service fees, overdraft fees, or ATM fees, associated with them, although the best banks don't charge fees. Money market accounts are no exception; in fact, they are more likely to charge fees than checking and savings accounts, and the fees they charge tend to be higher.
The most common fees you'll see with money market accounts are fees for falling under an average minimum monthly balance. Check with your bank or credit union ahead of time to see what fees and service charges come with the money market account you're interested in.
Limitations and considerations
Withdrawal and transaction limits
It's important to understand money market account limitations. Just like savings accounts, money market accounts frequently put limits on how many times you can withdraw money per month. There used to be a federal requirement that limited withdrawals to six per month; it's no longer enforced, but many money market accounts still have that limitation.
If being able to withdraw money without any limits is important to you, check with the bank or credit union you're interested in to see what its policies are. You might end up wanting a checking account instead.
Comparing MMAs to other investment options
When comparing money market accounts to investing, money market accounts have two big advantages: security and liquidity. In exchange, they generally don't offer as high rates of return.
For example, the average interest rate of a money market account is 0.66%, according to the FDIC. The best money market accounts make between over 5% APY.
In comparison, the average stock market return is historically around 10.7%. Keep in mind, though, that investment returns are nowhere near assured. It's very easy to lose money in the stock market, and even low-risk investments, like money market funds, come with the risk of losing money.
How to choose the right money market account
There are several important factors to consider when choosing a money market account, and what you care about most will likely depend on your personal values and needs.
Working on how to find the best money market rates might be the most important to you. However, it's also important to consider things like fees, minimum balance requirements, access to paper checks, or if the bank or credit union matches your values, such as environmentally friendly banks.
Rebell says that opening a money market account with a bank you already know is sometimes the right call. "There is something to be said, if you are comfortable in your bank, and you choose to keep your business there because of other services that they offer."
Role of money market accounts
Liquidity and risk management
Money market accounts are low-risk because they are bank accounts. With money market accounts, you can have easy access to your money during emergencies while still making a great rate, and you don't need to worry that your money will be gone when you need it most.
Ultimately, Rebell recommends speaking to a financial planner who can understand your individual situation when deciding on a financial portfolio. At the same time, Rebell says that money market accounts might be a good place for your emergency funds, depending on your situation.
"It's a good place to stash your emergency fund savings because you do have that liquidity, but you're getting that little bit extra bang for your buck," says Rebell. Keep in mind that a high-yield savings account might be better for you if your emergency fund is smaller and doesn't meet your money market account's minimum balance requirements.
Diversifying your savings strategies
Since money market accounts are low-risk, you might consider a higher-risk investment with a higher return, like a mutual fund, if you have money that you're not afraid to lose.
Investing apps can help you get started investing, if you're comfortable investing from your phone.
On the other hand, if you have money you don't want to lose but also won't need anytime soon, you might want to consider a certificate of deposit. These are insured, like money market accounts, but you generally can't withdraw money from them until their term length is up without paying significant fees.
