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If you've ever been frustrated by the low (or nonexistent) interest rates you earn on your regular savings or checking account, or wished you could write a check every once in a while from your savings instead of transferring funds, a money market account might be for you.
A money market account (MMA) is a deposit account that earns interest like a savings account but allows you to write a limited number of checks (or sometimes make debit transactions) for convenience. Interest rates are typically higher than for traditional savings accounts, and MMAs are available at a wide range of banks and credit unions.
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.
Money market accounts are generally used for savings. MMAs typically pay higher interest rates than traditional savings accounts and may offer easy access to your money using a debit card or checks. MMAs work well as general savings accounts or for specialized savings like emergency funds, saving for a down payment, sinking funds for big-ticket purchases or business savings.
The minimum balance requirements on a money market account will vary by financial institution. Here are three common requirements:
- Minimum deposit required to open an account
- Minimum daily balance required to earn interest
- Minimum daily balance required to avoid fees
Because failing to meet your minimum balance requirement could result in failing to earn interest or actually incurring fees, read the fine print before you open an account and make sure you can live with the terms.
As long as the financial institution is insured by the Federal Deposit Insurance Corp. (for banks) or National Credit Union Administration (for credit unions), your money market funds are covered up to $250,000 per depositor and account ownership type. If you have multiple accounts with a bank or credit union, or you maintain a balance of $250,000 or more in any account, talk to your financial institution to confirm your coverage.
Like other savings accounts at banks and credit unions, money market accounts are a safe place to keep your money without the risks you might have with investments. Not only is your account balance immune to stock market fluctuations, but your money is also insured in case of bank or credit union failure.
While you won't lose money on your account, you could be charged a fee if you don't follow minimum balance and other requirements on the account. These fees can quickly add up, so shop for an account with requirements that fit your finances and make sure you follow requirements to the letter to avoid charges.
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.