Published in: Banks | Jan. 28, 2019

4 Times You Should Open a Money Market Account

By:  Eric Volkman

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There are instances where a savings account or certificate of deposit just won’t do.

A pile of bound twenty and fifty dollar bills.

Image source: Getty Images

A money market account isn’t one of the better-known bank account types, but it is one of the more useful. It is effectively a hybrid savings and checking account, almost always paying more interest than the former while offering some of the flexibility of the latter.

Money market funds can have high buy-ins in the form of minimum opening deposits, so they’re not necessarily for everyone. But they should be considered if you find yourself in one or more of the following circumstances.

When you have money to save

An MMA is essentially an instrument for saving money. Although MMA holders have better access to their dosh than they do with a traditional savings account, there are still fairly strict legal limits on withdrawals and transfers. For example, only six “convenient” withdrawals from an MMA can be made per month. Automated Clearing House (ACH) and wire transfers, to name two, both fall under the definition of “convenient.”

So an MMA should only be considered if you have a stack of cash that has to be parked somewhere, and that you won’t need to draw from much. The legal restrictions help avoid the temptation to dip into the account excessively; advantageous interest rates (see below) also encourage a hands-off policy.

It's not unusual for an MMA to have a minimum opening deposit. This varies by bank and can reach into the low five-figure range.

When you want a relatively high APY

The best way to encourage the saving of money is to offer a high return for doing so. That’s the dynamic behind the relatively meaty APYs offered by MMAs compared to more traditional accounts like checking and savings.

Interest rates are still quite low these days, so we’re not talking a wide gap here. APYs for a decent MMA range from 2.0% to 2.4% just now, while you can get 1% or so for a typical savings account (checking accounts rarely pay interest; when they do this tends to be only slightly above 0%).

That said, the difference between an MMA paying out at 2% and a savings account that earns 1% can be noticeable. Say you have $20,000 you want to park in a savings instrument -- you’d reap $400 at the end of one year with the MMA, but only $200 if you’d put it in the savings account.

When you need more flexibility than a CD

As a relatively high-yielding bank product, an MMA is often compared to the certificate of deposit (CD), which usually has the highest APY among traditional bank offerings. The MMA, though, allows its owners to draw from the account from time to time if need be. This can be a lifesaver when a sudden, unexpected spending emergency occurs and you have few or no other financial means to cope with it.

A CD, by contrast, will almost always penalize an account holder for withdrawals, since it imposes penalties on those drawing money before maturity.

It’s important to emphasize that while there is scope for withdrawing and transferring funds from an MMA, it is not meant to be a spending account. Because of the legal restrictions placed on it, withdrawals and/or transfers should only be done sparingly, on an as needed basis. So don’t put funds in an MMA that you’ll require for spending immediately, or in the proximate future.

When you want to capitalize on rising interest rates

Interest rates are on their way up, which is why clever savers are eyeballing MMAs at the moment. Banks can offer the aforementioned higher interest rates for MMAs because they put the balances into short-term, generally reliable and steady investments like fast-maturing government bonds.

Since the instruments a bank utilizes the MMA balances for are short-term, they’re among the first investments to benefit from an interest rate hike once they roll over. As a result, banks tend to adjust their MMA rates upward more quickly than they do with other bank account types (particularly CDs, with their often long terms, i.e. times to maturity).

Although it seems the Fed intends to keep lifting rates, the boosts have been incremental. So we shouldn’t expect an MMA to suddenly start paying out 10% when we wake up next Monday. But if we’re good about keeping most or all of our MMA balance intact, we’ll earn a bit more in interest as a reward for our discipline and patience.

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