Savings accounts are great places to deposit your money and leave it. Though, they aren’t always the most convenient when need to access your money quickly and easily. This leads some consumers to avoid savings altogether.
If you want to save money but need ready access to the funds, consider opening a money market account. But what is a money market account and how does it work? Keep reading to find out.
What Is a Money Market Account?
A money market account shares similarities with a checking account and a savings account, so it is somewhat of a hybrid. Like a savings account, money market accounts pay interest on the balance you deposit. They typically come with checks and debit cards for easy access to your money, like checking accounts.
However, there are a few unique things about these accounts. Interest rates are sometimes higher than savings account interest, although they can go up or down. Furthermore, even though you can pull your money out more easily than you could from a traditional savings account, banks usually limit you to six fee-free withdrawals per month.
How Does a Money Market Account Work?
Money market accounts work similarly to other bank accounts. You deposit your money into the account and the bank pays you an agreed-upon interest rate as a return on your investment. The individual bank decides the interest rate. So it usually makes sense to pick the money market account after researching different banks and looking for the best interest rate.
In some cases, the bank may require you to meet minimum balance and minimum deposit requirements. This differs from traditional savings accounts that don’t usually have minimum requirements.
How Money Market Accounts Compare To Other Types of Savings Accounts
Money market accounts aren’t the only types of savings accounts out there. Here’s a snapshot of how they compare to other popular savings options.
|Type of Account||Interest Rate||Account Size|
|Money Market||May be higher than traditional savings accounts, varies widely by bank||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||Up to 5.00%||Varo offers between and APY. You can earn the higher APY for balances up to $5,000. You would need to also have direct deposits linked to the account that add up to $1,000 and maintain a positive balance.|
|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
Money market accounts have reliably paid higher interest than savings accounts at some points in the past. As of September 2023, the average savings account pays 0.45% APY while the average money market account pays 0.65% APY.
But these APYs are just the averages, which means you can find money market accounts offering much higher and lower interest rate opportunities. For example, you can find high-yield savings accounts offering interest rates north of 5%. As the Federal Reserve increases interest rates, high-yield savings accounts will offer higher interest rates as well. With the Fed’s aggressive approach to interest rates at the moment, it may be some time before money market accounts yield more than high-yield savings accounts again.
Money Market Accounts vs. CDs
CDs typically offer significantly higher interest rates than money market accounts, but you’ll have to make a trade to get the extra interest. When you deposit money into a CD, you must agree not to touch that money for a predetermined period of time. That’s typically between one and five years.
So, while you can definitely earn more money with a CD, it may not be the best option. That’s because you won’t have access to the funds for an extended period of time. If you are working to build an emergency savings fund, easy access to a money market account might be a better fit than an inflexible CD.
Good To Know
Consider building your emergency savings in a traditional savings or money market account. Once your savings reach a comfortable limit, start earning higher interest by investing your excess in CDs and other high-yield options.
How To Choose a Money Market Account
Every money market account is different. Banks are free to set their own interest rates, require their own minimum deposits and choose whether to offer other benefits. Consider the following as you compare your options:
- Interest rates: The interest rate is how your money will grow as it sits idle in the account. Simply put, the higher the interest rates are, the more money you will earn. With that, it makes sense to shop around for the highest money market rate you can find.
- Account minimums: Chances are you’ll have to make a minimum deposit and maintain a minimum daily balance. Make sure the account you choose has limits you can live with.
- Accessibility: Some money market accounts come with checks, others with debit cards and others with both. Only sign up for a money market account that gives you access to your money the way you want it.
- Fees: Most bank accounts, including money market accounts, come with fees attached. Before signing up for any money market account, read the fine print to make sure you understand the fees attached.
- FDIC insurance: It’s critical to work with a financial institution that protects your funds with FDIC insurance. Without FDIC coverage, your funds won’t be protected if the bank fails. As a saver, it’s important to confirm this coverage before moving forward.
Advantages and Disadvantages of a Money Market Account
Every financial product has some benefits and drawbacks to be aware of. Below are some of the things to keep in mind before signing up for a money market account:
- Higher interest rate: Money market accounts tend to offer higher interest rates than traditional savings accounts.
- Easy access to the funds: Most money market accounts allow you to use the funds directly with a debit card, checks, or both.
- FDIC insurance: If you work with a bank that protects your funds with FDIC coverage, your savings are secure.
- Minimum deposit requirements: Many money market accounts impose minimum deposit requirements.
- Transaction limits: Some banks limit the number of transactions you can make from your money market account each month.
- Interest risk: Money market accounts don’t include a fixed interest rate. The variability means that the interest rate attached to your account could fall.
Who Is a Money Market Account Best For?
A money market account is usually best for savers who are growing their funds and don’t want to give up easy access. Savers can tuck funds into this account and access the money at any time. If you are still building an emergency fund but want your funds to work for you along the way, a money market account might be the perfect fit.
Some good uses for a money market account could include an emergency fund, vacation funds, tax payments, wedding funds, home renovations and other short-term savings goals.
Who Should Find Another Option?
If you want to lock in an interest rate for the long term, a CD might suit your needs better. That’s especially true if you already have an emergency fund stashed away in a high-yield savings account.
If you are looking to build wealth for retirement, a money market account might not be enough. Another option is to build an investment portfolio without a brokerage account.
Money market accounts are a good option for those who need easy access to the money they save. If that sounds like you, compare your options at different banks. However, if you’re looking for much higher interest rates than those that savings accounts offer — and you can comfortably put your money in an account you can’t access for some time — a money market account is not the right fit.
Money Market Account FAQHere are the answers to some of the most frequently asked questions about money market accounts.
- What is the downside of a money market account?
- Money market accounts typically come with a minimum deposit and daily balance requirements some may have difficulty meeting. Moreover, money market accounts tend to pay less interest when economic conditions worsen.
- Is a money market account a good idea?
- Think about what you need from your savings account. If you need immediate access to savings from time to time without running to the bank or transferring funds between accounts, a money market account is a good choice. If not, a high-yield savings account or CD with a higher return may be more fitting for your situation.
- What is the difference between a money market account and a savings account?
- Banks use the money deposited in savings and money market accounts in different ways. While funds from savings are typically loaned to other customers, banks invest in short-term debt securities with money market account funds. For consumers, the main difference is that savings accounts typically don't come with minimum balance and deposit requirements. Moreover, it can be more difficult to access your money when it's in a savings account than when it's in a money market account.
- How much money can you put in a money market account?
- The amount of money you can put into a money market account generally varies based on the financial institution. Some banks don't have a limit on how much you can store in a money market account. But keep FDIC coverage limits, which protect up to $250,000, per depositor, per account type, in mind.
- Do money markets pay interest monthly?
- Money market accounts can pay interest on a monthly basis. In some cases, the interest may compound on a daily basis but hit your account on a monthly basis.
- Does money grow in a money market account?
- Yes, money can grow in a money market account. A money market account that has an interest rate attached will accrue interest earnings based on your account balance.
- How much money do I need to keep in a money market account?
- The amount of money you need to keep in a money market account varies. Some financial institutions impose minimum balance requirements, which means you'll need to keep at least that amount in your account. But if the account you use doesn't impose a balance requirement, you can keep as much or as little as you want within the account.
Sarah Sharkey contributed to the reporting for this article.
Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Oct. 13, 2023.
Banks that Offer Money Market Accounts:
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