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Money market accounts are interest-bearing accounts available at banks and credit unions. They are similar to savings accounts, but will generally offer a higher interest rate than a standard savings account. Money market accounts also offer some of the features typically only associated with a checking account, including check-writing privileges and/or a debit card, making them a type of hybrid bank account.A money market savings account may be a good choice for short-term savings goals, like building an emergency fund or putting a downpayment on a car. However, you may be able to get higher returns with other types of savings products, such as a high-yield savings account or certificate of deposit (CD).Read on to learn more about money market accounts, including how they work, how they compare to other types of savings vehicles, plus tips on how to find the right money market account for your needs.
What Is a Money Market Account?
Sometimes called money market deposit accounts or money market savings accounts, money market accounts are financial products offered at traditional and online banks and credit unions. They give account holders many of the key benefits of a savings account while providing them with some of the conveniences of a checking account.Like savings accounts, money market accounts pay interest on your deposits, allowing your money to grow over time. This interest is often expressed as an annual percentage yield (APY). Money market accounts generally pay higher APYs than traditional savings accounts. They also typically require larger opening deposits and minimum balance requirements compared to regular savings accounts.Like checking accounts, money market accounts offer checks and debit cards, giving you more ways to withdraw money than a savings account.However, these accounts aren’t meant to replace your checking account. As with savings accounts, money market accounts are often limited to a total of six transfers and electronic payments per month. Federal regulations governing these limits were loosened to allow banks to lift these limits in 2020 (due to the pandemic), but many institutions still maintain them. Recommended: What is a Business Money Market Account?
How Do Money Market Accounts Work?
Like savings and checking accounts, the money you put in a money market account is generally safe, since it’s federally insured. The Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 per depositor, per account ownership type at each bank. This means that if you have $200,000 in a money market account and $50,000 in a checking account with the same bank, all of your money is protected in the event of bank failure. Anything over this amount would not be insured (unless it falls into a different ownership category, such as a jointly owned account). Money market accounts at credit unions are insured by the National Credit Union Administration (NCUA) under the same terms.Many banks require an initial minimum deposit for money market accounts that is often higher than traditional savings accounts. They may also require a certain minimum balance at all times. If you fall below that amount, you’ll likely be charged a fee and/or receive a lower APY.
Pros and Cons of Money Market Accounts
Like any financial product, there are both advantages and disadvantages to having a money market account. Here’s a look at how they stack up.
Pros
You can earn interest on your money Money market accounts usually pay higher APYs than standard savings accounts.
Deposits are insured The FDIC and NCUA insure money market accounts from banks and credit unions respectively.
Debit card and checks Money market accounts often offer a debit card and/or paper checks, making it easy to access your money once you’ve reached your savings goal.
Cons
Initial deposit and balance requirements Money market accounts generally require a large initial deposit and may also impose a relatively high minimum balance requirement to earn the advertised rate and/or avoid a fee.
Lower yields than other bank products You may be able to get a higher APY with a high-yield savings account or certificate of deposit (CD).
Withdrawal restrictions Money market accounts, like savings accounts, aren’t meant for daily transactions. Withdrawals or payments by debit card, check, or electronic transfer are usually limited to six per month. (ATM and in-person withdrawals are unlimited.)
Pros
Cons
Higher APYs than tradition savings
High initial deposits
Federally insured
Minimum balance requirements
Multiple ways to access funds
Withdrawal restrictions
Money Market Accounts vs. Savings Accounts
Money market accounts resemble savings accounts in many ways. Both are deposit accounts offered by traditional banks, online banks, and credit unions. In addition, both accounts are insured, offer variable interest rates, and typically come with a limit in the number of transactions you can make per month.But there are some notable differences. Money market accounts usually pay a higher APY than traditional savings accounts (though sometimes lower than high-yield savings accounts). They also tend to have higher minimum balance requirements. And, unlike savings accounts, money market accounts allow debit card transactions and check-writing capabilities.
Similar to checking accounts, money market accounts typically allow account holders to write checks and use debit cards for purchases. However, these accounts are not meant to be used for everyday money management. Unlike checking accounts, you are typically limited to six transfers and electronic payments from a money market fund per month. If you exceed the threshold, you will likely get hit with a fee.And though some checking accounts offer interest, money market accounts offer rates that are generally much higher than checking accounts.Recommended: Checking vs Savings Account Differences
Money Market Account vs. Certificate of Deposit (CDs)
A CD is a type of savings account with a fixed time period and interest rate. A CD may have a higher APY than a money market account but requires you to leave your money untouched for a certain period of time, which could be anywhere from three months to five years. Like money market accounts, CDs are FDIC and NCUA insured. Unlike money market accounts, CDs have guaranteed returns. If you open a CD when interest rates are high, you can enjoy that rate even if banks drop rates on savings accounts and new CDs. If rates rise after you open a CD, however, you’ll continue to get the older rate.If you are choosing between a money market account and a CD for a short-term savings goal, you'll want to compare APYs and also consider when you’ll need to access the funds.
How are Money Market Accounts and Money Market Funds Different?
Despite their similar names, money market accounts and money market funds differ in several ways. Money market funds, also known as money market mutual funds, are investment products that allow consumers to earn interest in a lower-risk environment than the stock market. They offer similar liquidity to a money market account but have some key differences, including:
Interest rates Money market funds typically offer a slightly higher return than a money market account.
Accessibility Unlike a money market account, investors don’t have access to money market funds through debit cards or check-writing privileges. There is also typically a delay between making a withdrawal from a money market fund and having funds arrive in your bank account.
Safety Since money market funds are investment products, they’re not insured against loss by the FDIC or NCUA. Though these funds are considered low risk, your investment could lose money.
Choosing a Money Market Account
If you’re looking for a money market account, it can be a good idea to shop around and compare APYs. The published APY on an account includes the effects of compounding during the year. This means it includes the interest earned on your first deposit as well as the interest earned on any interest added to the account during the year. Interest can be compounded daily, monthly, or quarterly; the more frequently interest is added to your balance, the faster your savings will grow. To compare interest rates of money market accounts apples to apples, you’ll want to compare APYs and not interest rates.As you check rates, also be sure to check the fine print for balance requirements that could make it difficult for you to earn the advertised yield or avoid a fee. In some cases, balance requirements can be as high as $25,000. Also check for regular account fees, such as monthly maintenance fees, transfer fees, and inactive account fees.Finally, it can be a good idea to check how you can access your funds. Some money market accounts offer both checks and a debit card, while others offer only one of those options. Banks may also have varying limits on how many withdrawals you can make each statement cycle.
The Takeaway
Money market accounts can be a low-risk way to earn more interest than you would in a standard savings account. These accounts also offer some of the conveniences of a checking account, such as a debit card and checks.Money market accounts are generally best for short-term savings you want to keep highly liquid. Traditionally, these accounts were higher-interest alternatives to savings accounts. These days, however, they often carry the same (or potentially lower)
APYs than high-yield savings accounts. If you’re interested in finding the best rate for your savings, Lantern by SoF can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on interest rate, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.
Frequently Asked Questions
Is it possible to lose money in a money market account?
Is a money market account better than a savings account?
Do money market accounts or savings accounts pay more?
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About the Author
Walecia Konrad
Walecia Konrad is an award-winning financial journalist with 25 years of experience in print and digital media. She is a graduate of Syracuse University and specializes in the topics of health care, personal finance, and employer-sponsored benefits. Konrad's work has been seen on CBS MoneyWatch, The New York Times, Money, SmartMoney, BusinessWeek, and Forbes. She has been the recipient of both a Pearl Award for Best Web Publication of the Year and a National Magazine Award for Personal Service.
