What Is a Money Market Account?

How Does a Money Market Account Work?

A money market account combines some of the best features of a savings and checking account. Though interest rates and account requirements vary from one financial institution to another, here are a few features you're likely to find on MMAs:

• Available at most banks and credit unions
• Higher interest rates than a traditional savings account
• Convenient transaction tools like checks and debit cards
• Simple to open and operate
• Many have minimum balance requirements (and, if you don't meet them, fees)
• Many also have transaction limits (example: six checks or debit transactions per month)

MMAs may be most useful when you want a hybrid between checking and savings. Say, for example, you want a savings account for home expenses. A money market account is a great place to earn interest on your maintenance fund, and save up for property taxes or a home renovation. When it's time to pay your property taxes or contractor, you can use your checks or debit card without transferring money to a separate checking account first.

Pros and Cons of Money Market Accounts

Like all accounts, MMAs have their pros and cons. Although they aren't necessarily the best choice for every situation, they can shine under the right circumstances.

Pros of Money Market Accounts

• Easy access to money: In the age of digital banking and ATMs, even regular savings accounts are fairly accessible. However, check writing and debit cards make money markets user-friendly in more situations.
• Interest on money that's usually interest-free: It's not just that money markets pay higher annual percentage yield (APYs) than most regular savings; it's that money in your MMA might otherwise be sitting in your checking account earning nothing.
• Low risk: MMA funds don't lose value like an investment might, and your money is insured up to $250,000 per account holder.

Cons of Money Market Accounts

• Moderate gains: You might earn even more interest in a high-yield savings account or certificate of deposit (CD). You could also invest your money and (potentially) see better gains.
• Limited withdrawals: Doing more than six transactions in a month is easy, especially if you're thinking of your MMA as a low-key checking account alternative. Exceeding your transaction limit could lead to fees, which can reduce or eliminate what you earn in interest.
• Minimum balance requirement or minimum opening deposit: You may need a certain amount of money to open a money market account, and you may need to keep your balance above a threshold to avoid fees.

How to Open a Money Market Account

Opening an MMA is as simple as opening any bank or credit union account. Follow these basic steps:

1. Choose a Bank or Credit Union

You may want to start with your current financial institution, or shop around for a bank or credit union that offers competitive interest rates, low (or no) fees, account requirements you can work with and easy branch or online access. If you're comfortable using online and mobile banking, an online bank may work for you.

2. Gather the Information You'll Need

Standard requirements for opening an account include the following:

• Your name, address, phone number and email
• Social Security or individual taxpayer identification number
• Valid government-issued photo ID (driver's license, passport or military ID)
• Second form of ID, such as a Social Security card, birth certificate or bill with your name on it

3. Fund Your Account

Bring a check or use your debit card or bank account number to transfer money from your existing account into your new MMA. You may need to meet a minimum opening deposit; otherwise, consider starting small with $25 to $50, just to make sure your account is set up properly and your transfer goes through without incident.

Alternatives to Money Market Accounts

MMAs aren't the only accounts that pay interest or allow you to transact. You may prefer these MMA alternatives if they're more in line with your needs:

High-Yield Savings Accounts

As their name suggests, high-yield savings accounts pay top interest rates on your savings balance. Consider shopping online-only banks for competitive rates on high-yield savings.

CDs or Share Certificates

CDs or share certificates (as they're often known at credit unions) pay a relatively high fixed rate of interest for a fixed term. For example, you might get 4% interest for 12 months, but in exchange you agree not to withdraw your initial deposit until the 12 months are up. CDs pay competitive interest but are, clearly, not ideal for people who need to transact.

Interest Checking Accounts

Although interest checking accounts often come with minimum balance requirements and a raft of potential fees, they can work for people who want to earn interest on their checking account balances while making unrestricted transactions.

Money Market Funds

Money market funds may sound similar to money market accounts, but they are mutual funds that invest in low-risk, short-term assets like government debt and CDs. They may be an alternative if you're looking to make some gains on your savings without too much risk, but because they're investments and not bank accounts, they aren't insured.

FAQs

Still have questions about money market accounts? Here are answers to a few of the most commonly asked questions.

The Bottom Line

Under the right circumstances, money market accounts may be the Goldilocks of bank accounts: They offer some transaction capabilities and moderate interest in a single, flexible account. If you're interested in opening a money market account, taking the time to shop around for the best combination of interest rates, minimum balance requirements, fees and features could save you money and help you find the account that best fits your needs.