Money market accounts (MMAs) are deposit accounts that share features of savings and checking accounts. Like a savings account, your balance earns interest. However, you may also have the ability to write checks and/or use a debit card for account transactions like you would with a checking account.
Besides having components of savings and checking accounts, money market accounts also have distinct features that set them apart. Here’s what to know if you’re interested in opening one.
Money market definition: What is a money market account?
A money market account (MMA) is a type of deposit account that pays interest on your balance and provides limited access to your funds.
The main features of a money market account include:
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Earns interest: Money market accounts often offer competitive interest rates, similar to those offered on high-yield savings accounts and CDs. Currently, the national average rate for a money market account is 0.61%, though many financial institutions offer rates as high as 3%-4% APY.
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Tiered rates: MMA rates are often tiered, meaning the highest rates may be reserved for account holders with larger balances, while smaller balances may earn less interest. For instance, a bank might offer 0.10% APY on balances up to $5,000, 0.50% APY on balances of $5,001 to $10,000, and so on. Rates on money market accounts are also variable, meaning they can adjust up or down over time at the bank’s discretion.
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Easy access to funds: Many MMAs let you write checks or use a debit card, although there may be limits on certain types of withdrawals or transfers.
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FDIC/NCUA insured: If your account is at an FDIC-insured bank or an NCUA-insured credit union, your deposits are generally insured up to $250,000 per depositor, per institution.
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Higher minimum balance: Some money market accounts require a larger opening deposit or minimum balance than regular savings accounts. Falling below the minimum may result in fees or a lower interest rate.
Read more: How often do money market accounts pay interest?
Do money market accounts come with fees?
Money market accounts may be subject to certain fees, such as monthly maintenance fees. These fees vary widely by financial institution, so be sure to compare fees when selecting an account and choose one that comes with low or no fees.
It’s also important to pay attention to withdrawal limits. While the Federal Reserve essentially eliminated withdrawal limits in 2020, some banks still impose them. It’s common for banks to charge fees for exceeding six withdrawals within a month.
Pros and cons of money market accounts
There are a few benefits and drawbacks to putting your savings in a money market account.
Pros
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Higher interest rates compared to savings accounts: In most cases, money market accounts offer higher interest rates than traditional savings accounts. However, some high-yield savings accounts offer rates comparable to or higher than money market account rates, so it’s a good idea to consider both options.
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Lower risk compared to other investment options: If you’re saving for short-term goals or emergency needs, you don’t want your balance to lose value if the market dips. A money market account can be a great alternative to investing since money market accounts don’t lose money.
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Easy access to funds: While there may be limits on how often you can withdraw your funds, you’ll still have fairly easy access to your money via checks and/or a debit card.
Cons
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Limited withdrawals: If you plan to use your money market account for everyday banking, this may not be the best fit. While the federal government no longer limits monthly withdrawals on money market and savings accounts at six per month, some banks and credit unions still have these limits in place and may charge you a fee for excessive withdrawals.
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Lower potential returns compared to riskier investments: If you’re looking for a place to put your money for long-term financial needs such as retirement, you’ll have a better chance of reaching your savings goals with higher-risk market investments.
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Fees can diminish returns: If your money market account charges a monthly fee, it’ll eat into your interest earnings.
Is a money market account the same thing as a savings account?
A money market account is a type of deposit account that works very much like a savings account. However, there are some key differences.
Typically, money market accounts pay higher yields than most traditional savings accounts. However, you may need to maintain a higher minimum balance to earn the highest advertised rate and/or avoid monthly fees. There may also be limitations on how many withdrawals you can make per month.
In most cases, money market accounts also come with a debit card and check-writing privileges, which also differentiates them from savings accounts.
Learn more about how money market accounts differ from savings accounts.
Money market account vs. money market fund
A common misconception is that money market accounts are the same as money market funds. While their names sound similar, they work differently and serve different purposes.
A money market account is a deposit account offered by banks and credit unions that earns interest and is protected by federal insurance, making it a low-risk place to save cash.
A money market fund, on the other hand, is a type of mutual fund that invests in short-term, high-quality debt securities, such as Treasury bills and commercial paper. While money market funds are meant to maintain a stable share price, they are investments —not bank accounts — and are not FDIC insured, meaning they carry some investment risk.
Learn more about the differences between money market accounts vs. money market funds.
Alternatives to money market accounts
A money market account isn’t the only option out there. There are several types of savings products you can consider that may work better depending on your specific financial needs.
Traditional savings accounts
Traditional savings accounts are widely available at banks and credit unions. They offer nominal interest rates, but flexible access to your money. Traditional savings accounts generally don’t offer the same features as money market accounts, such as checks and debit cards.
High-yield savings accounts
With a high-yield savings account, your interest rate may be higher than what most money market accounts offer, and without needing to maintain a minimum balance. They also offer easy access to your funds.
Certificates of deposit (CDs)
Certificates of deposit require you to keep your money in the account for a certain period of time, known as the term. CD terms can range from a few months to several years. In return, you’ll earn a fixed interest rate, which varies by bank.
CD rates may be higher than money market account rates, depending on your financial institution. However, if you withdraw your money early, you’ll be subject to an early withdrawal penalty, which can cancel out part or all of those earnings.
High-yield checking accounts
High-yield checking accounts pay a higher yield than most traditional or interest-bearing checking accounts. In exchange for a higher yield, you may be subject to a monthly maintenance fee, a higher minimum opening deposit, or minimum balance requirements, although this is not always the case.
Savings bonds
Savings bonds are a type of debt security that essentially allows the public to lend money to the federal government in exchange for guaranteed interest for up to 30 years. Individuals can buy savings bonds in amounts ranging from $25 to $10,000.
Savings bonds are considered low-risk investments because they’re backed by the full faith and credit of the United States government. Interest is paid out when the bond reaches maturity or when it’s cashed in.
How to choose the right money market account
As with any type of account, it’s essential to compare your options if you’re interested in a new money market account. Researching the following factors can help you find an account that best meets your needs:
APY
The higher your annual percentage yield (APY), the more you stand to earn in a money market account. Before opening an account, take some time to compare rates available at different financial institutions to find the best option.
Read more: APY vs. interest rate: What’s the difference, and why does it matter?
Minimum balance
Pay attention to any minimum opening deposit or minimum balance requirements to determine whether an account is right for you. A higher minimum balance may come with a higher interest rate.
Account features
While many money market accounts offer check-writing privileges and debit card access, comparing different account features is still important. For instance, does the bank limit how much you can withdraw or how often you can take money out in a month? Are you able to monitor your account balance via mobile app?
Fees
Some banks may charge you fees if your money market account balance drops below a specific amount. Other fees may apply as well. Keep in mind that if a money market account offers a high APY and high fees, it may not be the best choice. Calculate how fees may impact your balance in addition to interest before opening a new account.
How to open a money market account
Opening a money market account is fairly simple and can often be done in a few minutes online. The process typically looks something like this:
1. Choose a financial institution
You’ll want to consider various factors such as branches or ATMs near you, customer service hours, mobile banking capabilities, and more. After thoroughly researching your options, choose your bank or credit union and get ready to open a money market account.
2. Gather necessary documents
You’ll need to provide certain documents and information to open a new account, including your Social Security number (SSN) or Individual Tax Identification Number (ITIN), a valid government-issued ID such as a driver’s license or passport, and proof of address.
Read more: What do you need to open a bank account?
3. Review account terms and conditions
Before opening an account, be sure you fully understand the account’s terms and conditions, including potential fees, minimum balance requirements, and more.
4. Submit your application
Once you’ve taken these steps, it’s time to open your account. Many institutions let you sign up for a new account online, which can be convenient. Others let you sign up in person or over the phone. Choose the option that’s most comfortable for you.
5. Fund your account
Once your account is approved and opened, you’ll need to transfer money into it. Some accounts may require you to fund it within a certain time frame.
Learn more about how to open a money market account.
Making the most of your money market account
As with other types of savings accounts, you’ll likely be able to track money market account transactions and review your balance online. Some banks may also offer a mobile app that allows you to access your account at any time. Others may have physical branches you can visit.
Overall, a money market account may be a smart option for short- or medium-term savings goals. For instance, if you want to build an emergency fund or save for a car down payment, opening a money market account could work in your favor. However, keep in mind these accounts aren’t great for long-term savings goals, such as retirement, as investments may offer better returns.