Many of the best books about saving money recommend money market accounts (MMAs) to set aside funds for a future purchase.
But what makes MMAs so appealing?
This article covers the basics of money market accounts and how they work. You'll get a list of the pros and cons, the situations when they're most appropriate, and comparisons with other popular savings tools.
What is a money market account?
A money market account is a kind of depository account offered by banks and credit unions. Like savings accounts, MMAs earn interest, and you can deposit and withdraw money from them.
Most MMAs pay a higher interest rate than regular savings accounts because they invest in short-term debt securities traded on the money market. And while they often include check-writing and debit card privileges, they're usually less flexible than a regular checking account.
Money market accounts are sometimes referred to as money market deposit accounts (MMDA) or money market savings accounts (MMSA). They shouldn't be confused with money market mutual funds, which are uninsured investment vehicles rather than accounts.
How does a money market account work?
Opening a money market account is as easy as opening any other type of interest-bearing bank account. However, in some cases, you may have to meet a minimum initial deposit requirement to open the account and maintain a minimum balance to benefit from advertised interest rates.
After opening your account, you can deposit money into it and begin earning interest. Most money market accounts pay a variable interest rate, and many also have tiered rates, meaning higher balances earn a higher annual percentage yield (APY).
You can deposit and withdraw funds from your account whenever you choose, but transfers and electronic payments are limited to six per month.
Money market account pros and cons
Money market accounts come with advantages and disadvantages.
The benefits of a money market account include:
- Flexible access: A money market account allows easy access to your money at any time by linking a debit card you can use to make ATM withdrawals and writing checks.
- Interest rates: Money market accounts offer slightly better interest rates than other deposit accounts.
- Low risk. Funds in money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
The disadvantages of money market accounts include:
- Minimum balance and opening deposit requirements. Money market accounts often have minimum balance requirements to allow you to benefit from their interest rates. Minimums can range from $1 to $10,000.
- Fees. Banks sometimes charge monthly maintenance fees on money market accounts. In some cases, it's possible to waive the fee by meeting daily balance or direct deposit requirements.
- Withdrawal restrictions. Federal Reserve Regulation D limits money market accounts to a total of six transfers and electronic payments per month. If you exceed the limit, you may be charged a fine or have your account converted into a checking account.
When is a money market most useful?
Because of limits on the number of monthly transactions, MMAs aren't the best place to keep funds for regular expenses. Instead, they're most useful for large, infrequent monthly expenses or short- and medium-term savings goals.
Here are some examples of some of the most common uses for a money market account:
- Emergency funds
- Quarterly tax payments
- Mortgage payments
- Savings to buy a car in cash
- Savings for a down payment on a home
What to consider before opening a money market account
When shopping for a money market account, look at the following information:
- Annual percentage yield (APY): You're usually looking for the highest APY, but be sure to keep in mind any eligibility requirements.
- Minimum deposit and minimum balance requirements: Your choice may vary depending on how much money you have to deposit.
- Features: Debit or ATM cards make it easier to withdraw funds, and check-writing privileges help pay bills.
- Brick-and-mortar vs. online: Some people prefer physical branches, but online banks and credit unions often offer better interest rates.
What is the average interest rate on a money market?
According to a Bankrate survey, the average interest rate on a money market account is 0.07%. But many of the best money market accounts offer high yields up to 0.55%, so it's essential to shop around before deciding.
Money market account vs. certificate of deposit (CD)
Certificates of deposit usually offer higher interest rates than money market accounts. In exchange for those higher earnings, you're required to deposit a lump sum and leave it untouched for a predetermined amount of time, usually between three months and five years.
If you want to maintain access to your funds, a money market account is a better option than a certificate of deposit. If you're saving for a later date and want better rates, get a CD.
Money market account vs. savings account
Although they have a lot in common, the differences between money market accounts and savings accounts come down to flexibility, returns, and costs.
While both types of accounts limit the number of transfers and electronic payments you can make in a month to six, money market accounts give you more flexibility because they offer debit cards, ATM cards, and check-writing privileges.
MMAs also tend to offer more competitive rates, although new high-yield savings accounts have narrowed the gap between the two.
Finally, savings accounts often have low fees and no minimum balances. In contrast, many money market accounts charge monthly maintenance fees and require minimum balances to benefit from their higher interest rates.
Choosing between a money market account and a traditional savings account often depends on how much money you have to deposit. If you can meet their eligibility requirements, money market accounts usually come out on top.
Can you withdraw money from a money market account without penalty?
Yes, usually. While most financial institutions don't charge fees on withdrawals, some will limit the number of withdrawals you can make in a month. You might also get charged an early close-out fee if you withdraw to close your account.
Can you add money to a money market account?
Yes. Money market accounts are liquid accounts, meaning you can deposit funds into the account at any time.
Can you pay bills and write checks with your money market account?
Some money market accounts allow you to write checks or pay bills directly from the account with a debit card. But keep in mind that transactions are often limited to six per month.
The bottom line
Whether you're planning on becoming a self-made millionaire or are just saving up for college, money market accounts are a great way to earn high interest on your money.
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