What Are Money Market Accounts?

Definition & Examples of Money Market Accounts

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Money market accounts are government-insured interest-bearing bank accounts that often come with check-writing and debit card privileges.

Learn how money market accounts work and differentiate between these and other accounts to determine whether they're the right vehicle for your goals and liquidity needs.

What Are Money Market Accounts?

Money market accounts are deposit accounts offered by banks and credit unions and insured by the U.S. government. If you open one of these accounts at a bank, your deposits are insured by the Federal Deposit Insurance Corporation (FDIC). In contrast, the National Credit Union Administration (NCUA) insures money market accounts at credit unions.

The versatile accounts allow consumers to deposit, withdraw, or transfer money and combine features of both savings and checking accounts. Like savings accounts, they earn interest at current interest rates and have traditionally allowed no more than six withdrawals per month. And similar to checking accounts, they often let you write checks and conduct debit card transactions.

The withdrawal restriction was lifted in April 2020 but still applies at some financial institutions. Check with yours for the latest rules.

Money market accounts are often confused with money market funds, which are mutual funds offered by investment companies. Consumers prize the liquidity of both money market accounts and money market funds since they both offer easy access to cash. But they're not the same thing. Money market accounts are insured cash deposit accounts that represent readily available cash, which is why they're also referred to as "money market deposit accounts." Money market funds are classified as cash equivalents and are not FDIC- or NCUA-insured; you can easily convert them to cash but can also lose the money you invest in a money market fund.

A money market account is safer than a money market fund as up to $250,000 per depositor, per institution is insured by the FDIC or NCUA, provided you're a customer of an insured institution.

How Do Money Market Accounts Work?

These deposit accounts were first authorized in 1982 to allow banks to compete with money market funds. Today, they offer an alternative to financial products coming out of Wall Street as well as savings accounts and certificates of deposit offered by Main Street banks. Consumers use these accounts to meet a variety of short- and long-term needs:

  • Build your emergency fund: Use this interest-bearing account to stash emergency reserves for unplanned expenses like surprise medical or home repair bills.
  • Grow a sinking fund: Save for planned expenses like a down payment or a vacation.
  • Make infrequent purchases: The withdrawal limit that has historically applied to these accounts makes them unsuitable for day-to-day spending. But they're good for the rare check or debit card purchase for infrequent expenses like quarterly tax payments or tuition.
  • Park discretionary funds: If you have money you're not yet sure how to allocate, deposit it in a money market account and let it earn interest until you've decided how to use it.

Money Market Accounts vs. Savings Accounts

Both accounts earn interest and offer easy access to cash by allowing you to withdraw money on demand up to the withdrawal limits. But they don't always serve the same goals.

Money market accounts generally offer higher interest rates on deposits than savings accounts, which may make them a better vehicle for large or long-term deposits. And unlike savings accounts, they can double as spending accounts since many money market accounts come with check-writing privileges and a debit card for purchases or ATM withdrawals.

Despite offering more methods for spending, money market accounts arguably offer less liquidity than savings accounts since they typically require you to maintain a higher minimum balance to avoid a monthly maintenance fee. As a result, they keep more of your money tied up every month and unavailable for use. However, there are money market accounts and savings accounts with no minimum balance requirements or monthly maintenance fees.

Pros and Cons of Money Market Accounts

Pros
  • Higher interest rates

  • Check-writing

  • Debit cards

  • Deposit insurance

Cons
  • Higher minimum balance requirements

  • Monthly fees

  • Withdrawal limits

Pros Explained

  • High interest rates: Interest rates tend to be higher than those for savings accounts, allowing your money to work harder for you.
  • Check-writing: Many money market accounts allow customers to write checks to draw on their deposits when a debit card isn't accepted.
  • Debit cards: The debit card that comes with many of these accounts allows you to make infrequent purchases even more conveniently with plastic.
  • Deposit insurance: Insurance from the FDIC or NCUA grants you the peace of mind that you won't lose your money even if a bank folds.

Cons Explained

  • High minimum balance requirements: You'll often have to maintain a higher account balance than you would with a savings account, which you may not be able to afford or which may prevent you from covering other expenses.
  • Monthly fees: If you can't meet the minimum balance requirement, you'll pay fees that can eat into your deposits.
  • Withdrawal limits: The cap on the number of monthly withdrawals you can traditionally make from these accounts makes them impractical for everyday spending.

Key Takeaways

  • Money market accounts are government-insured accounts offered by banks and credit unions.
  • They share features in common with savings and checking accounts, including the ability to earn interest and even write checks or use a debit card.
  • They're an ideal vehicle for emergency and sinking funds.
  • They offer high liquidity but less so than savings accounts because of their traditionally higher minimum balance requirements and monthly fees.

Article Sources

  1. Consumer Financial Protection Bureau. "What Is a Money Market Account?" Accessed June 23, 2020.

  2. FederalReserve.gov. "Regulation D1 Reserve Requirements," Page 4. Accessed June 23, 2020.

  3. Board of the 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." Accessed June 23, 2020.

  4. National Credit Union Administration. "Share Insurance Fund Overview." Accessed June 23, 2020.

  5. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs." Accessed June 23, 2020.

  6. GAO. "Federal Reserve Observations on Regulation D and the Use of Reserve Requirements," Page 15. Accessed June 23, 2020.

  7. Investor.gov. "How to Save and Invest." Accessed June 23, 2020.

  8. Department of Financial Insurance. "8 Tips to Help You Save For a Rainy Day." Accessed June 23, 2020.