Money Market Accounts: The Complete Guide

Learn all you need to know about money market accounts

Money market accounts are a special type of savings account that typically offer higher interest yields than regular checking and saving accounts. Of course, that’s not really saying much. The average account rate is 0.16%, compared to just 0.09% for regular savings accounts. It may not sound like a lot, but you could almost double the amount of interest you earn each year just by making the switch.

So if you want to maximize your savings while maintaining instant access to your money, a money market savings account could be a smart choice.

This guide can help you to decide if this type of account is right for you. So keep reading to learn what money market savings accounts are, how they work, and much more. Also, review the comparisons and other types of accounts. After reading this, you should be able to choose the best savings accounts to suit your financial situation.

What is a money market account?

For anyone unfamiliar with this type of account, here’s a quick definition. Money market accounts are savings accounts that come with high-interest rates. They offer convenient banking features that other savings accounts lack, such as check-writing and debit card access. Like any financial product, these types of accounts have some drawbacks, such as high minimum balance requirements and monthly maintenance fees.

But overall, this type of account can be a sound option if you want to earn more interest on your savings without taking any risk. If you’re wondering if money market savings accounts are FDIC-insured, the answer is yes. Your savings in a money market account have the same protections as a savings or checking account, which is up to $250,000 per depositor.

How do money market accounts work

Money market accounts are a cross between a checking and savings account. Similar to checking accounts, they come with check writing and debit card privileges. This makes it easy to access your money and make purchases at any time. But because money market accounts are savings accounts, they have strict transaction limits.

You can only make six withdrawals or transfers from your account each month. If you go over the limit, your bank may charge you a fee, convert your account to checking or close it altogether. So you’ll need to be careful with your withdrawal activity if you want to keep your account active.

Another drawback of these types of accounts is that they often come with high minimum balance requirements. That means you may have to maintain a balance of several thousand dollars to avoid getting hit with a monthly fee. Some money market savings accounts also come with monthly maintenance fees that can eat into the interest you earn.

Money market accounts can provide more flexibility than regular savings accounts. Unlike a savings account, they give you the ability to write checks and use debit cards, giving you easy access to your money.

Why is a high interest rate important?

Finding a money market account that offers high-interest rates is important because it allows you to grow your savings faster. For example, you have $10,000 in a money market savings account. The difference in earnings over one year between a 0.16% APY, the national average, and 1.75% APY, Sallie Mae’s money market rate for January 2020, would be $159.

The 0.16% APY would only earn you $16, while the 1.75% APY would earn you $175. So shop around for competitive APYs and also be sure to consider monthly maintenance fees because they can cut into your earnings.

Understanding the pros and cons

Depending on your financial situation and needs, a money market savings account may not be right for you. Here’s a list of pros and cons to consider if you’re thinking about opening a savings account.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • They are FDIC- insured. Just like regular checking and savings accounts, money market accounts are FDIC-insured up to $250,000 per depositor. This makes them a much safer savings vehicle than investment accounts because you’re guaranteed not to lose your money.
  • You earn higher interest rates. On average, money market savings accounts offer almost double the interest rate of regular savings accounts. If your main priority is more interest and you currently have a traditional savings account, you should consider opening this type of account.
  • They are more flexible. Unlike certificates of deposit, these types of savings accounts allow you to access your money at any time. You’ll be able to pull out cash if you need it without facing penalties, which is a big plus. You can also write checks and make purchases with this type of account, which you can’t do with a regular savings account. This makes it much easier to access and use your money on a daily basis.
Cons
  • These types of accounts have high minimum balances. Most money market savings accounts require minimum balances of at least $1,000. If your account dips below a certain threshold, you may also get hit with fees. So if you don’t have a few thousand dollars saved up yet, you may want to start with a high-interest savings account with no minimum instead.
  • They offer limited transactions. Although money market accounts provide the same features as checking accounts, they’re actually savings accounts. This means they have to follow the same federal guidelines as savings accounts. For instance, you can only make a maximum of six transfers and withdrawals from your account in a month. Some banks even limit your monthly transactions to three.
  • They sometimes come with fees. Some money market accounts have monthly maintenance fees, which reduces the total amount of interest you earn. To avoid this downside, look for accounts with no fees when you’re shopping around.

Alternatives to consider

If money market accounts aren’t right for you, there are plenty of alternatives. Here are some savings and investment vehicles you should also consider:

Savings accounts

Money market accounts often have higher interest rates than traditional savings accounts, which allows you to earn more interest on your money. They also have debit and check-writing privileges, which regular savings accounts don’t. Savings accounts have much lower minimum balances, though. So if you’re just getting started with saving, you may want to consider high-interest savings accounts instead.

Certificates of deposit

Certificates of deposit offer higher interest rates than money market accounts. The catch is you have to keep your money in them without touching it for a set time. Because certificates of deposit restrict your access to your money, they offer less flexibility than money market savings accounts.

If you know that you’re not going to touch your money for at least a few months, certificates of deposit may be a good option for you. On average, CDs with terms longer than three months offer higher interest rates than money market savings accounts, so the loss of flexibility may be worth it.

Checking accounts

Checking accounts have high liquidity, so they don’t limit your withdrawals or transfers. But most checking accounts don’t earn interest, so you’ll lose money by keeping your savings there. For that reason, only keep what you need for bills for a month or two in your checking account. Move the rest to a place that has the highest annual percentage yields.

Mutual funds

A mutual fund is a pooled fund that allows investors to buy into a wide selection of securities such as stocks and bonds. They range from mutual funds that invest in highly-speculative stocks to funds that are devoted to low-risk assets, such as blue-chip stocks and high-quality bonds. However, all mutual funds come with a degree of risk.

Money market funds, on the other hand, invest only in ultra-safe investments such as Treasury securities, which are secured by the U.S. government. In any case, your money is insured by the FDIC when you invest in a money market fund. Of course, the lower the risk, the lower the return on your investment.

When does a money market account make the most sense?

A money market account is a great place to stash savings that you’ll need in the near future. Unlike certificates of deposit, these types of accounts allow you to access your cash at any time, as long as you stay under the transaction limit. That’s why they’re a great way to store money you need to withdraw on short notice, like your emergency fund.

Money market savings accounts are also a good place to put the money you’re saving for short-term goals. For instance, if you plan to take a trip, you could deposit your money a few times a month to earn extra interest while saving up for it.

You won’t have to wait for your certificate of deposit to mature before you take your trip. You’ll be able to withdraw your money and go. So if you want more flexibility, a money market account makes sense.

How to choose a money market account

When opening a money market account, it’s important to compare several options before you choose one. Some money market accounts have higher APYs than others, so shop around. Additionally, look for an account that doesn’t have monthly maintenance fees. Otherwise, most of your interest will go toward paying fees.

If you don’t have a big budget to work with, look out for accounts with a reasonable minimum balance. You may want to try to open an account that doesn’t charge a fee for dipping under the minimum balance, too.

Opening a money market account can be a great way to earn more interest on your money and build up your savings. If you’re ready to make the switch, your best bet is to browse the leading account providers. Compare the main factors, such as interest rates, maintenance fees, and minimum balances to find the best fit for you.