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How to shop for 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 money market account rate is 0.08%, compared to 0.06% for regular savings accounts and just 0.03% for interest checking accounts (as of 18 October 2021). It may not sound like a lot, but the extra 0.02% to 0.05% could make a noticeable difference in your interest earnings over time.
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 higher 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. Money market accounts have the same protections as savings and checking accounts — up to $250,000 per depositor. (For money markets accounts offered by credit unions, the insurer in different, but the protections are similar.)
Money market account highlights:
- Interest-bearing deposit accounts.
- Offered by banks and credit unions.
- Higher interest rates than standard savings accounts (usually).
- Higher minimum balance than standard savings accounts (usually).
- Limited to only six withdrawals/transfers per month.
- Insured by the FDIC (Federal Deposit Insurance Corp.) or, if provided by a credit union, the NCUSIF (National Credit Union Share Insurance Fund).
- Less liquid than a checking account but more liquid than bonds.
- No set term.
How do money market accounts work?
Where the interest comes from
When you store money in a money market account, financial institutions like banks and credit unions invest it into short-term, liquid securities like certificates of deposit (CDs), government securities, and treasury notes.
As those investments earn interest, the institutions pay you according to an agreed rate, often on a monthly basis. There is no set term for the account. It can earn interest for as long as it remains open.
Ease of use
In terms of how you use them, money market accounts are a cross between checking and savings accounts. Similar to checking accounts, they come with check-writing privileges and a debit card. This makes it easy to access your money and make purchases at any time.
Money market accounts can provide more flexibility than regular savings accounts. Unlike savings accounts, they give you the ability to write checks and use debit cards, giving you easy access to your money.
Withdrawal transaction limits
Though more flexible than traditional savings accounts, money market accounts are savings accounts. As such, they have strict transaction limits. Federal Reserve Regulation D imposes the limits.
The regulation states that you can’t transfer money out of your account more than six times per month. This applies to transfers made via check, debit card, draft, online banking transfer, phone request, preauthorized agreement, etc. Withdrawals made in-person at a banking office or at an ATM are not limited.
If you go over the limit, your bank may charge you a fee, convert your account to checking (with 0% interest), or close the account altogether. So you’ll need to be careful with your withdrawal activity if you want to keep your account active.
Initial deposit and account balance minimums
Another drawback of these types of accounts is that they often come with high initial deposit and minimum balance requirements.
An initial deposit requirement for a money market account is the amount you must deposit in order to open the account. These requirements vary from one provider to the next. For example, CIT Bank requires a minimum of $100, while USAA and BBVA Compass require a minimum of only $25.
$25 to $100 minimums are obviously not “high” and probably won’t deter you from opening an account if other terms are good. But some of these types of accounts do come with high requirements. That means you may have to maintain a balance of several thousand dollars to avoid getting hit with an excessive transaction fee.
Some banks favor a carrot rather than a stick when it comes to account balances. Rather than punitive fees for falling below a minimum balance, some banks and credit unions have multiple tiers of deposits which correspond with increasing APYs. (APY stands for annual percentage yield, the amount you earn per year on the money in your account, accounting for compounding interest.) The more you deposit, the more interest you can earn.
Excessive transaction fees are not the only fees you have to worry about with these accounts. Some money market savings accounts also come with monthly maintenance fees that can eat into the interest you earn.
Also look out for other fees. These can add up and negate your interest earnings. These include (but are not limited to) fees for wire transfers, statement copies, processing foreign checks, etc.
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 1.75% APY, Sallie Mae’s money market rate for January 2020, and a 0.16% APY, the national average at that time, would be $159.
The 0.16% APY would only earn you $16, while the 1.75% APY would earn you $175. Rates across the board are lower now, of course, but the principle remains valid. 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 an account.
Here is a list of the benefits and the drawbacks to consider.
- 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. Historically, money market savings accounts offered almost double the interest rate of regular savings accounts. The averages are a bit closer together now (in 2021), but the best money market accounts still offer much better rates than average 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, something you can’t do with a regular savings account. This makes it much easier to access and use your money on a daily basis.
- 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:
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 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.
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 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.
Frequently asked questions about money market accounts
Next, let’s look at some frequently asked questions about money market accounts.
Which money market account is best?
The best money market account for you depends on your circumstances. money market accounts vary in minimum deposit requirements, APYs, fees, and minimum balance requirements.
To find the best account, look for the highest APY at the lowest cost with the fewest restrictions. Also, be sure to consider the company’s reputation and reviews.
What are money market accounts paying?
The national average APY on money market accounts is currently (November 2021) 0.08%. However, the banks and credit unions that SuperMoney monitors offer APYs well above this. Take a look at what the best of these are offering right now. Online financial institutions often offer the best rates.
What are money market accounts good for?
Money market accounts can be a good place to invest your money and earn a modest return. They often offer higher returns than savings or interest checking accounts. Further, they offer more liquidity than CDs. However, money market accounts are most profitable when you deposit thousands into the account and then leave it alone.
What is a money market account’s interest?
Money market accounts pay interest on the money in your account according to the APY you were assigned. Your APY is set based on the going rate and how much money you initially deposited.
What is the difference between a money market account and a money market fund?
A money market account is an insured deposit account from a bank or credit union which they invest in stable, low-risk vehicles.
A money market fund is an open-ended mutual fund offered by select banks, brokerage houses, and mutual fund companies which they invest in short-term debt securities. It is not insured because it’s considered an investment account rather than a deposit account.
Money market funds are considered relatively safe. They offer higher yields than money market accounts, but they carry more risk.
When do money market accounts pay interest?
Most money market accounts pay interest on a monthly basis as long as you have money in the account and meet the account’s requirements.
Who offers money market accounts?
Banks and credit unions across the United States offer money market accounts.
How are money market accounts taxed?
The interest earned on a money market account is considered taxable income. The amount of tax that you pay depends on your income and tax bracket. If you earned at least ten dollars in interest in a year, you’ll receive a 1099-INT form and can use it to report those earnings.
How are money market accounts insured?
Money market accounts are insured by the FDIC and NCUSIF.
How is the interest in a money market account calculated?
With most money market accounts, interest is calculated daily. How do you calculate it? First, divide your APY by 365 to get the daily rate. For example, if your rate is 2%, your daily rate would be 0.005%. Next, multiply your balance by the daily rate. Do this for every day of a month, and then add each of those figures together to get your total monthly interest earned.
How safe are money market accounts?
Money market accounts are very stable and safe because the funds are insured by the FDIC and NCUSIF and invested in low-risk vehicles.
How much do money market accounts make?
The average APY on money market accounts in the U.S. is 0.08%. That means that if you had $10,000 in an account, you’d make $8 by the end of the year. However, if you found an account with a 1% APY, you could earn $100 in a year’s time.
How can I start a money market account?
The best way to start a money market account is to figure out how much money you have to invest. Next, shop around to find the best account for your needs. Then, apply to open the account, deposit your money, and start earning.
How liquid is a money market account?
Money market accounts are more liquid than CDs but less liquid than checking accounts. Like a savings account, the number of withdrawals you can make within a month is limited by Regulation D. It is designed to be an account where your money is left alone for the most part, but where you can still access it for emergencies.
Are there money market accounts with no minimum deposit?
Money market accounts without minimum deposits do exist. However, be sure to check the APY before you deposit your money. APYs for accounts without a minimum deposit are usually low.
Do money market accounts come with check-writing?
Some, but not all, money market accounts come with the ability to write a limited number of checks per month.
Do money market accounts come with bonuses?
You may find some money market account offers that include bonuses or promotions when you sign up. The reward could be cash, an introductory APR, etc.
Is a money market account right for you?
Interested in a money market account? It may be a good fit if you:
- Want to earn more interest than you can earn in a savings account.
- Have at least a few thousand dollars to deposit.
- Want an account that is more liquid than savings or CDs but earns more interest than checking.
- Want to be able to write checks.
To decide if a money market account is right for you, you’ll need to shop around and compare your options. Online banks and credit unions are offering increasingly attractive rates and terms thanks to their low overhead. Given this, now is a good time to find out what you can get. Compare industry-leading institutions and their money market account offerings below.