Offering a higher interest rate than a regular savings account with the accessibility of a checking account, a money market account is a great place to stash your emergency savings. The hybrid kind of account has been an option since the 1980s wave of banking deregulation. Prior to then, the government limited how much interest banks and credit unions could pay, hindering their ability to compete with less regulated money market mutual funds. Banks wanted to offer a “money market” rate, ergo the name of the account type. Read on for more about how money market accounts work, the pros and cons and our top picks.
Money Market Account Defined
Put simply, a money market account (MMA), also called a money market deposit account, is a type of savings account offered by banks, credit unions and other financial institutions. This type of account accrues interest on funds you deposit, just like a savings account. In fact, most money market accounts offer higher interest rates than standard savings accounts.
Money market accounts come with other perks too, though. Like a checking account, you can write checks, make online bill payments and withdraw funds with an ATM card. However, you are limited to only six transactions a month by federal regulation (these don’t include ATM withdrawals). If you go over that limit, your bank can close the account, levy fees or convert the account to a checking account.
Money market accounts essentially offer a combination of features from typical savings and checking accounts. Some bankers compare it to a high-yield savings account, but it’s really much more. Check out how the features stack up with other account types below:
Bank Account Comparison
|Savings Account||Checking Account||Money Market Account|
|Insured by the FDIC||Yes||Yes||Yes|
|Earns Interest||Yes||Usually No||Yes|
|Can Write Checks||No||Yes||Yes|
|Comes With Debit Card||No||Yes||Yes|
Money market accounts were originally developed so banks could compete with high-yield yet liquid financial products that Wall Street was launching, like certificates of deposit. While they work very similarly to savings accounts on the consumer side, banks can use your MMA funds differently.
It’s important to note that a money market account is not a money market mutual fund, which is an investment that could increase or decrease in value based on market behavior.
How Do Money Market Accounts Work?
Money market accounts work similarly to a savings account. You can deposit and withdraw funds into a money market account as you see fit, but you’re usually limited to six transfers per month in accordance with Regulation D. As noted earlier, this limit does not include ATM withdrawals or withdrawals you make in person. Money market accounts often come with required minimum balances. If you make more withdrawals than allowed or don’t maintain your required minimum balance, banks will often charge a fee.
Beyond providing funds for bank loans like a regular savings account, your money market funds can also be used in low-risk investments like CDs and bonds. Since they provide this added value for banks (and they usually have higher minimum balance requirements), banks are willing to pay higher yields on money market accounts.
Since rates are often tiered, they become a more attractive tool, the more money you put into them. Interest is compounded either daily or monthly and interest is usually paid out monthly. Some banks, however, will make your interest payments quarterly.
Pros of a Money Market Account
There are many benefits for keeping your savings in a money market account. The main reason people stash their funds this way is because money market accounts can yield higher interest than both a checking account or a simple savings account. Many savings accounts earn as little as 0.1% interest. You stand to earn more with a money market account. Think between 1% to 2%, depending on the institution.
Another big advantage of money market accounts is liquidity and flexibility. Most MMAs allow you to make up to six transactions or write up to three checks a month. Some also allow you to link a debit card to your account. There are typically no fees for writing checks and no penalties for large withdrawals as there can be with other high-yield accounts.
Money market accounts are also extremely safe. Money market accounts from a bank are backed by the Federal Deposit Insurance Company (FDIC) for up to $250,000 per account and those from credit unions are backed by the National Credit Union Administration (NCUA). That means your principal balance is covered against loss if something goes wrong with your bank, credit union or financial institution. Some accounts could be insured for even higher amounts if they’re linked to property investments.
Cons of a Money Market Account
Of course, money market accounts aren’t perfect. While they have a great combination of benefits, they also have some downsides to offset their higher returns. For one, some people can’t afford a money market account. Banks often require a minimum deposit to open the account, then a minimum balance to keep in the account. It’s usually much higher than regular savings accounts. This often means $5,000, but can be up to $10,000 at some banks. As stated above, you need to pay a fee if your balance dips below the minimum requirement.
Since they’re a type of savings account, money market account holders can only make six transactions, including online transfers, debit purchases and bill payments every month or payment cycle per FDIC rules. This forces users to treat their MMA funds as true savings. If you want the ability to write more checks or make more online bill payments, you may want to look into a high-interest checking account.
Also, while money market accounts offer better rates than most standard savings accounts, you could find even better earnings elsewhere. If you’re able to store your funds for a long period, compare your money market account rates to what you may earn from other savings vehicles, like money market funds or CDs. If you can earn more elsewhere, it may be a better idea. Just keep in mind that higher-earning accounts usually have account size requirements or charge a penalty for early withdrawals.
What to Use Money Market Accounts for
Money markets are a safe place to keep your money accessible while it earns some interest. As long as you can meet the minimum balance (if there is one) and only need to access your funds at most a few times a month, then an MMA is a great low-risk savings vehicle. You should consider a money market account if you:
- Tend to keep high amounts of money in your checking account
- Want access to your savings in case of emergency
- Need the ability to write a few checks each month
- Want to make a few debit card transactions a month
Money market accounts aren’t the best place to keep money for regular expenses because there are limits on how many transactions you can make a month. They are, however, extremely useful for money that you will (or might) need in the near future. This makes money market accounts great for large and infrequent expenses, like tax payments, college tuition and vacations. They’re also a great place to build your emergency fund. You want to keep this money somewhere separate from your regular spending account so you aren’t tempted to use it. An MMA will help it grow faster.
Who Offers Money Market Accounts?
Money market accounts are available through banks, credit unions and other financial institutions. Ideally, you want to find a money market account with the best interest rates you can find and no monthly fees. You may need to meet a minimum deposit amount. Additionally, look for perks like remote check deposit, online bill pay and 24/7 account access.
Check out our top three picks for money market accounts below.
TIAA Bank Money Market Account
TIAA Bank’s money market account has a 4.75% APY, which is very good in the grand scheme of the market. You’ll need no minimum balance to open an account. The TIAA money market account has an introductory rate that is higher.
Sallie Mae Money Market Account
Though best known for student loans, Sallie Mae also offers money market accounts. The bank’s premier MMA has a competitive APY of 4.75%. The account doesn’t require a minimum deposit or minimum daily balance. Sallie Mae also doesn’t charge maintenance fees either. You can write checks and deposit checks on your phone, which cuts down on checking account transfers. The Sallie Mae Money Market account also comes with free transfers. There’s even 24/7 online account access. Your funds would be slightly harder to access though, as there are no ATM withdrawals.
Synchrony Money Market Account
We also like the money market account from online bank Synchrony. It comes with a 2.25% APY with no minimum balance. There are also no monthly service or transaction fees. Account holders can write checks and make withdrawals online, through a mobile app, or by using their ATM cards. It’s really one of the best options for those looking for an easily accessible high-yield account.
If you want to use a money market account to save for retirement, Synchrony also has a traditional or Roth IRA money market option. The interest rate is also 2.25%, but it would be tax-deferred or tax-free.
These are just a few of the best money market accounts at the time of the writing of this article. Discover, Capital One, American Express, Bank of Internet, All America, UFB Direct and Pacific National Bank may also offer competitive rates.
Tips for Opening a New Bank Account
- Before you open another account at your regular bank, see if there’s a better option out there for you. It pays to comparison shop and find the best money market account, or another kind of bank account, for your hard-earned dollars. It may seem like a pain to have accounts in more than one spot, but you can stand to save much more money giving another institution a try.
- On that note, have you checked out your local credit union? These overlooked financial institutions may not always have the best web presence, but often offer some of the most competitive savings rates.
- Wondering when it’s right to open a joint account or add a significant other to an existing one? It can be a tricky decision. Luckily, SmartAsset has given the topic some thought.
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