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What Is a Money Market Account?

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A money market account (MMA) is a lesser-known cousin of the savings account, but it shares features of the checking account as well. It can help you earn a high rate of interest on your savings, but it's not a great fit for everyone. Here's an in-depth look at how money market accounts work and how they stack up to other types of savings accounts.

What is a money market account?

A money market account is a type of savings account offered by most banks and credit unions. It's not to be confused with money market funds, which are investment funds. Money market accounts are FDIC-insured bank accounts, just like checking and savings accounts, so your money is protected in case of bank failure.

MMAs offer interest rates that are as high or higher than many high-yield savings account APYs. That means they can help you grow your money more quickly than you could in a checking account or traditional savings account at a brick-and-mortar bank. But unlike savings accounts, money market accounts may come with checks or a debit card so you can withdraw funds directly.

Money market account pros and cons

Like all bank accounts, money market accounts have their advantages and disadvantages. Here's a closer look at both.

Pros of a money market account

These are some of the key benefits of a money market account:

  • High APY: Money market account APYs can be higher than the APYs you'll find with high-yield savings accounts. A higher APY helps you earn interest more quickly than you could in a checking account or even in many traditional savings accounts.
  • FDIC-insured: Money market accounts are FDIC-insured, so there's no risk of losing money with this account if your bank goes under. Keep in mind that the FDIC only insures up to $250,000 per person per bank account. If you plan to keep more than this in a money market account, you should spread the money around between multiple banks.
  • Easy access to funds: MMAs enable you to directly withdraw funds from your account via electronic transfer and often by check or debit card. Savings accounts rarely give customers debit cards or checks, so you must transfer money to another account first before you can withdraw it. This makes them less convenient than money market accounts for those who need to withdraw their savings quickly.

Cons of a money market account

Here are a few drawbacks to be aware of if you're considering opening a money market account:

  • High minimum deposit: Money market accounts often have higher minimum balance requirements than savings accounts. If you cannot meet these requirements, you may not be able to open the account or you may not earn the advertised interest rate. There are some money market accounts with a low or no minimum balance requirement, but if you want the highest interest rates, you should be prepared to deposit a four- or even five-figure sum.
  • Transaction limits: Money market accounts are limited to six transfers or withdrawals per month by federal law, just like savings accounts. Deposits don't count toward this limit, nor do ATM withdrawals or withdrawals made at a bank branch. But electronic transfers out of the account, automatic bill pay, and check withdrawals do count. If you exceed this limit, you'll pay an additional per-transaction fee, which could make money market accounts costly for those who move their money around often.
  • Not a great fit for long-term savings: While money market accounts do offer a high APY compared to other types of bank accounts, you may still be able to earn a larger return with a CD or by investing your funds with a good stock broker if you don't anticipate using that money within the next few years.

Money market account vs. CD

Money market accounts and certificates of deposit (CDs) both enable you to earn a high rate of interest on your savings, and they're both available through banks and credit unions. The key difference between them comes down to access. MMAs allow you to withdraw funds whenever you need to, though they charge a fee if you exceed your monthly transaction limits.

CDs actively discourage you from withdrawing funds before a certain date. Every CD has a term, which can range from three months on the short end to over five years on the long end. If you leave your money in the CD for the whole term, you can earn a higher APY than you'll find with most other bank accounts, especially if you choose a longer CD term. But if you withdraw your money sooner, you will pay a penalty equivalent to one or more months of interest. You're also forced to withdraw all of your money at once. You can't just take out part of it.

As long as you don't withdraw your money before the CD term is up, a CD can potentially earn you more. You can set up a CD ladder if you want access to some of your funds every year. This is where you divide up the total amount you were going to deposit into equal chunks and put them into CD terms of varying lengths.

For example, you might split $5,000 into five $1,000 chunks and invest one chunk each in a one-, two-, three-, four-, and five-year CD, respectively. When the one-year CD term ends, you invest it in a new five-year CD. Do the same thing next year when the two-year CD term ends and so on. This gives you access to some money every year and enables you to take advantage of new interest rates if they've risen since you bought your last CD.

But if you're unsure when you'll need to withdraw the funds or know for sure that you'll need the money before your CD term would be up, a money market account is a better option.

Money market account vs. savings account

Money market accounts and savings accounts are very similar. The big difference is that, unlike savings accounts, money market accounts give you options to directly withdraw funds. MMAs also offer higher APYs than you'll find with many savings accounts at brick-and-mortar banks, though some high-yield savings accounts available through online banks can come pretty close.

Money market accounts typically have higher minimum balance requirements than savings accounts. You might need $1,000 or more to open a money market account while you can open a savings account with $100 or less. So if you don't have a lot to deposit and don't mind transferring your money to a checking account when you want to withdraw it, a savings account could be a better fit.

Is a money market account right for you?

Money market accounts are a smart option if you want to earn a high interest rate on your savings without giving up easy access to your money, as you would with a CD or, to some extent, a savings account. You can withdraw funds directly from your MMA as needed, though you'll still want a checking account for your everyday spending so you don't exceed the monthly transaction limit.

If you don't have a lot of money to deposit, look for a money market account with a low or no minimum deposit requirement or consider a high-yield savings account instead. These accounts can offer APYs that are close to, if not as high as the rates you'll find with money market accounts.

Finally, if you don't anticipate using your savings in the next few years, consider placing some of your savings in a CD instead. These accounts limit your accessibility, but you may be able to earn an even higher interest rate than you could with an MMA.

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