What Is a Money Market Account?
If you’re interested in saving some money, but you think you might need ready access to your cash, consider a money market account. It’s a savings account that allows you to access your money and earn a bit of interest at the same time.
What Is a Money Market Account?
A money market account is a type of savings account with some checking or debit card features attached. There’s usually a limit to how many checking or debit transactions you can make a month, which is six, typically.
Traditionally, money market accounts have paid higher interest rates than regular savings accounts, but these days, their rates are very similar. The best-paying money market account right now offers an interest rate of about 1%, whereas the highest interest rate on a regular savings account is about 0.6%. These rates are subject to change, and rates may improve in the future.
How Does a Money Market Account Work?
A money market account works just like a regular savings account. You deposit your money, and the bank pays you an agreed-upon amount of interest. Unlike a certificate of deposit, you don’t have to leave your funds in a money market account untouched. You can access it whenever you need it.
Good To Know
Most money market accounts require a certain minimum initial deposit. This is different from savings accounts, which typically don’t have such requirements. In exchange for this higher deposit, you earn a higher interest rate — or at least, that used to be the case.
Interest rates fluctuate. When the economy suffers, the federal government lowers interest rates so that it’s cheaper for consumers to borrow money or invest it. This stimulates the economy because people are more likely to make a big purchase if interest rates are low. However, low interest rates are not good for savings accounts. If the economy picks up, interest rates will rise, making money market accounts a better investment.
Money Market Accounts vs. Other Savings Accounts
| Type of Account | Interest Rate | Account Size |
|---|---|---|
| Money Market | May be higher than traditional savings accounts | Between $500 and $2,500 |
| Traditional Savings | Less than 1% | • As little as $1, but some accounts require a higher initial deposit. • Some require a higher balance to avoid fees. Traditional Bank, for example, requires $100 in the account to avoid the $2 monthly service fee. |
| High-Yield Savings | As high as 2.80% | Varo offers 2.80% if you also have a checking account and keep at least $1,000 in it. |
| CD Accounts | Higher rates than other types of savings accounts; the longer the term, the higher the interest rate | Between $0 and $2,500 |
Money Market Accounts vs. Savings Accounts
Right now, the interest rates for savings accounts and money market accounts are very similar. Rates are set by individual banks but are influenced by the federal reserve.
The federal reserve affects the interest rate by adjusting the federal funds rate, which is what banks charge other banks for loans. This trickles down to interest rates set on money market and savings accounts. Although they’re close to zero right now, interest rates on savings accounts have been as high as 5.5% in the past.
Money Market Accounts vs. CDs
CDs will earn you a higher interest rate than money market accounts, but you have to leave the money in the account for an agreed-upon term. The longer the term, the higher the interest rate. If you don’t withdraw the money at the end of the term, some banks automatically roll the funds over, thus tying up your money for another term.
How To Choose a Money Market Account
Shop around for the best rate. You’ll probably earn a higher rate by going to an online bank. Brick-and-mortar banks have higher overhead than online banks do, and therefore they don’t usually offer as competitive a rate as you’ll find online.
Many money market accounts don’t charge any fees. If there are fees associated with a money market account you’re considering, make sure the benefits outweigh the costs.
Don’t get confused between money market accounts, which are a type of savings account, and money market funds, which are a type of mutual fund.
Advice
The inflation rate is currently about 2.24%. Putting money in a savings account earning 0.5% interest means you’re technically losing money. On the other hand, most checking accounts pay no interest at all, so it might pay to open a money market account if you need ready access to your cash.
You can still use the account for up to six transactions a month. However, you need to make sure not to go over those six transactions, or you’ll be hit with fees, which could wipe out any gains you make on interest. If you can keep to less than six transactions, a money market account offers a way to earn some interest and still use the checking benefits.
Data is accurate as of Mar. 15, 2021, and is subject to change.
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- Affinity Plus Federal Credit Union. "Money Market Accounts."
- CNBC. "Why Do Interest Rates on High-Yield Savings Accounts Fluctuate?"
- Deposit Accounts. "How To Open a Money Market Account."
- Traditional Bank. "Savings."
- Board of Governors of the Federal Reserve System. 2020. "How Does the Federal Reserve Affect Inflation and Employment?"
- Statista. 2021. "Projected Annual Inflation Rate in the United States From 2010 To 2021."
