What Is a Money Market Account?

Man setting up money market account with a banker
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DEFINITION

A money market account is a high-interest savings account that also shares some features with checking accounts. If you have enough cash on hand to open one, it can be a useful savings tool that allows limited access to your funds while earning more interest than a traditional savings account.

Definition and Example of a Money Market Account

A money market account (MMA) is essentially a savings account that has some of the features of a checking account. You'll usually get checks or a debit card, and you can make a few transactions each month, but you won't have quite the freedom of a typical checking account. There are also a few key differences between money market accounts and traditional savings accounts, including higher minimum deposit requirements and better interest rates for MMAs.

  • Alternate names: Money market deposit account, money market savings account
  • Acronyms: MMA, MMDA, MMSA

For example, a typical money market account might require a minimum deposit of $1,000 with an interest rate of 0.15%; or it might require a minimum deposit of $10,000 accompanied by a higher interest rate of up to 0.29%. You might receive a set number of checks or even a debit card to make withdrawals, but these will be limited in number before fees kick in.

With a money market account, you'll usually be able to write a limited number of checks, unlike a traditional checking account.

How a Money Market Account Works

Many banks and credit unions offer money market account options, both in-person and online. Today, many banks offer $0 minimum balance accounts. If your bank provides checks for your MMA, it will give you these along with your other account paperwork, which details terms such as the maximum number of transactions per month.

Your account terms will also explain your annual percentage yield (APY), which is the rate at which your MMA will earn compounding interest over the course of a year. For example, if you put $10,000 into an MMA with an APY of 0.29% on January 1 and don't add any more money, by the end of the year, you'll have $10,029.

As long as you bank at an FDIC-insured institution (or an NCUA-insured credit union), your money market account, combined with any other bank account balances at the same institution, will be insured for up to a total of $250,000 for a single account or $500,000 for a joint account ($250,000 for each joint account holder).

Pros and Cons of Money Market Accounts

Pros
  • Insured up to FDIC or NCUSIF limits

  • Pays higher interest than some traditional savings accounts

  • Money is accessible

Cons
  • Some banks may limit the number of transactions per month

  • Introductory interest rates may be higher than actual APY

  • May not be insured at some institutions

Pros Explained

MMAs offer some key advantages that make them attractive savings vehicles for people who are looking to start putting away their money.

  • Insured up to FDIC or NCUA limits: Like other checking and savings accounts at federally insured banking institutions, your money is safe and protected up to the federal limit.
  • Pays higher interest than some traditional savings accounts: You'll often get better interest rates on an MMA than you'll get from a traditional savings account. Larger account balances also help you earn more interest, and the return is usually somewhere between those of a certificate of deposit (CD) and a savings account.
  • Money is accessible: Most accounts allow you to write checks or withdraw cash, and some offer a debit card you can use to make purchases. This easy access, combined with a competitive interest rate, is what has traditionally made MMAs unique. In recent years, rewards checking, interest checking accounts, and online banks have become more popular and offer the same benefits. Still, sometimes you'll get a better deal from a money market account.

Cons Explained

MMAs have some nice features, but you should be aware of a few downsides to them before opening an account.

  • Some banks may limit the number of transactions per month: You have access to cash in an MMA, but your bank may limit your transactions to less than six times per month—this was a federal law until April 2020. However, some banks still implement it depending on internal policies. You can generally withdraw cash as often as you like, but these accounts aren't as flexible as your checking account when it comes to everyday use.
  • Introductory interest rates may be higher than actual APY: If the rate sounds too good to be true, double-check to make sure it's a permanent interest rate, not a promotional rate that will disappear in a month.
  • May not be insured at some institutions: Make sure you use an MMA from a bank or credit union that will insure your funds. Ask your bank or credit union to verify that your funds are insured and keep your deposits below the maximum covered limits.

Don't confuse these accounts with money market mutual funds, which have a role in investment planning but are not the same financial tool. Money market mutual funds are not insured by the federal government.

Do You Need a Money Market Account?

MMAs are a great place to put the money you might need in the relatively near future. They allow you to earn a small return while keeping the funds safe and accessible. They're especially useful for large, infrequent expenses such as:

  • Emergency funds
  • Budgeting for quarterly tax payments
  • Tuition

A money market account isn't the best place to keep funds for regular expenses because of the limits on how many check-based payments you can make. However, to earn a bit more interest, you could keep funds in an MMA for a few of your largest monthly expenses, such as your mortgage.

Alternatives to Money Market Accounts

If you don't need immediate access to your cash, you can look at higher-yielding CDs. You can even use a series of CDs—known as a "CD ladder"—to earn decent returns while keeping some of your money liquid and minimizing early-withdrawal penalties. If you're investing for the long term, talk with a financial planner about what mix of investments can best help you reach your goals.

Key Takeaways

  • Money market accounts are a type of bank account that combines some of the benefits of checking and savings accounts.
  • They usually pay a higher interest rate than traditional checking and savings accounts while allowing more access to your funds than a certificate of deposit.
  • These accounts are a good tool for emergency funds or other expenses that you don't need to pay on a regular basis.
  • Money kept in an FDIC- or NCUSIF-insured institution is protected up to the federal limits.
  • MMAs should not be confused with money market mutual funds, which are a type of investment tool and not federally insured.

Article Sources

  1. Capital One. "What Is a Money Market Account?"

  2. Federal Deposit Insurance Corporation. "Deposit Insurance at a Glance."

  3. National Credit Union Administration. "How Your Accounts Are Federally Insured," Page 2.

  4. Board of Governors of the Federal Reserve System. "Federal Reserve Board Announces Interim Final Rule To Delete the Six-per-Month Limit on Convenient Transfers From the 'Savings Deposit' Definition in Regulation D."

  5. Consumer Financial Protection Bureau. "What Is a Money Market Account?"