Published in: Banks | Sept. 18, 2019

4 Reasons to Open a Money Market Account

By:  Kailey Hagen

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How does earning more money sound to you?

Just about everyone is familiar with the concept of a savings account, but few know much about its cousin, the money market account (MMA). These accounts share many features, but the MMA can be a superior place to park your cash if you can meet its minimum balance requirements, which are often higher than those of savings accounts.

What's a money market account?

A money market account is similar to a savings account in many respects, but they are slightly more flexible and differ in the way that banks can use the funds. When you place money in a savings account, the bank can only use that money to finance loans and lines of credit for other customers and make money on the interest. They're not able to invest it to help it grow more quickly.

MMAs give banks this freedom. They're able to invest your money in short-term, highly liquid securities like government bonds or certificates of deposit (CDs). This doesn't change your customer experience at all, but it enables banks to make money more quickly and they can then pass some of these earnings along to you. 

Smiling young woman holding a piggy bank.

Image source: Getty Images

Here's a closer look at a few reasons you may want to consider a money market account if you have some savings you want to keep close at hand.

1. Money market interest rates are often higher

Banks are able to increase their own profits more quickly by investing your money, so it makes sense that money market account interest rates are often higher than savings account interest rates. The annual percentage yield (APY) on an average savings account is 0.09% for accounts with balances under $100,000 as of Aug. 5, 2019, according to the Federal Deposit Insurance Corporation (FDIC). The average MMA APY is double that -- 0.18%. 

To put that in perspective, consider a $10,000 deposit that’s been left untouched for 10 years. If you had that money in a savings account earning 0.09% APY, you'd end up with about $10,090. But if you'd had that money in a money market account earning 0.18% APY, you'd have closer to $10,181. That's a $91 difference. And this difference can be even more significant depending on how much you keep in the account, how long the money stays there, and what types of interest rates your bank offers on savings and money market accounts. 

If you shop around, you can find both high-interest savings accounts and MMAs with APYs in excess of 2%.

2. Your money is FDIC-insured

Investing is a better choice for long-term savings, but the risk-averse may like the idea of placing their money in a secure account where they know they can't lose it. The FDIC insures money market accounts just as they do checking and savings accounts. In the unlikely event that your bank goes under, the FDIC will pay you up to $250,000 per account type. But don't store any more than this in your money market account if you're concerned about the possibility of losing your money.

3. You can access your money easily when you need to

Even though the bank invests your money in securities, you can still easily withdraw funds from your money market account or transfer them to a different account as needed. There are a few restrictions to be aware of, though. First, federal law limits you to six "convenient" withdrawals from an MMA each month. This is also true of savings accounts. 

A "convenient" withdrawal is when you transfer or withdraw money online, by phone, or by writing a check. Exceeding your convenient withdrawal limit per month could bring extra fees. But you can exceed this limit by making additional "inconvenient" withdrawals, like visiting a bank teller in person or asking your bank to send you a check. These types of withdrawals wouldn’t cost you any extra.

You also have to stay mindful of your MMA's minimum balance, which in some cases can be up to $10,000. If you fall below the minimum balance, you may not earn the high interest rates you'd hoped for, or your bank may convert your money market account to a traditional savings account. 

4. You can access funds with debit cards and checks

Some money market accounts enable you to withdraw funds directly from the account via debit card or check. This is useful if you don't want to have to remember to transfer money from your MMA to your checking account every time you need to access your cash. But don't let the convenience make you forget about your monthly withdrawal limit, or your bank may hit you with additional service fees.

If you have a lot of money in savings, a high-interest savings account may be a better choice than an MMA. But if you have a sizable sum that you plan to spend in the next few years, an MMA could help your savings grow more quickly and keep up with inflation better. Compare money market accounts at a few banks and read the fine print to ensure that you understand their rules.

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