Interest-bearing accounts are one of the most common tools that consumers use to increase their savings. The interest rates on these accounts, however, are extremely low — the interest rate on a basic savings account is generally about 0.01% APY, and at that rate, it’s almost not worth it to bother collecting the interest.
But there’s another way to save your money, one that can earn a lot more interest: a money market account. Money market accounts offer several attractive features, but they aren’t for everyone. Learn about money market accounts so you can decide whether they’re right for your financial strategy.
What Is a Money Market Account?
A money market account is an account that pays higher interest than a traditional savings account with a rate set according to money market interest rates. Many banks require a higher minimum deposit — ranging from $500 to $50,000 — to open a money market account than a regular savings account, but money market accounts include limited check-writing privileges, giving customers greater flexibility than regular savings.
Money market accounts have the same FDIC insurance as savings accounts and are also subject to Regulation D — that is, a maximum of six “convenient” transfers each month. These convenient transfers include electronic, telephone and check transactions. Transactions made through the mail or at an ATM are not limited.
Note that a money market account is different than a money market fund. Money market funds are low-risk, short-term investment funds that maintain a net asset value of $1 per share.
How Does a Money Market Account Work?
A money market account’s interest compounds often, usually on a daily or monthly basis, and is paid on a monthly or quarterly basis. Some money market accounts offer rates as high as 1.00% APY.
You can deposit money into your money market account at any time through check deposit or online transfer. You can also close your money market account at any time with no penalty.
In addition to its other features, a money market account is a safe account to have when you bank with a credit union that is insured with the NCUA or a bank insured by the FDIC, as most are. The NCUA and FDIC insure up to $250,000 per depositor, per account.
Should You Open a Money Market Account?
Although money market accounts offer attractive rates and features, the limited number of transfers allowed per the Fed’s Regulation D can be a problem for some consumers who need to maintain easily accessible liquid assets. Knowing the functions and limitations of money market accounts versus savings accounts can help you decide which type of account to open.
Pros of Money Market Accounts
Some of the advantages a money market account offers include the following:
- Higher interest rate than regular savings
- Interest is compounded more frequently than savings account interest
- Up to $250,000 is FDIC-insured
- No penalty for closing the account
- Some check-writing privileges
Cons of Money Market Accounts
On the other hand, disadvantages of a money market account include:
- Only six convenient transactions are allowed per month
- Higher minimum deposit to open than is required for a savings account
- Lower average interest rate than the average 8 to 10 percent yield investors can make in the stock market
The rules and regulations surrounding money market accounts can make them a better fit for a consumer who’s financially secure than a consumer who’s not quite financially stable yet. For someone who has some savings already established, for example, providing the high minimum opening deposit and being limited to six transactions in a month would likely not be a problem. For someone who doesn’t have the minimum deposit and needs more frequent access to funds or more liquidity should an emergency come up, a traditional savings account might be preferable.
Additionally, money market accounts can be a tool for diversifying a financial plan. Consumers who are looking for ways to build larger savings or spread savings across multiple accounts protected by FDIC insurance could use money market accounts in conjunction with traditional savings and different investing strategies.