What Is a Money Market Account?

A money market account (MMA) is a type of savings account that also has checking account features. However, unlike a savings account, which is only for saving your money, MMAs typically come with a debit card and checks, similar to a checking account.

Money market accounts tend to pay higher interest than traditional savings accounts. They are also insured by the Federal Deposit Insurance Corp (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions.

How do money market accounts work?

Money market accounts work similarly to other deposit accounts, including traditional savings and high-yield savings accounts. When you deposit your money into an MMA account, your money earns compound interest, which simply means getting paid interest on top of interest.

Because money market accounts earn higher interest than traditional savings accounts and checking accounts, you’ll likely benefit more from saving in an MMA. As we mentioned earlier, money market accounts also come with checking account features, including the ability to write checks and sometimes a debit or ATM card.

However, many banks and credit unions still only allow up to six transactions per month with an MMA account, regardless of it’s checking features. Depending on how you use your MMA account, this limitation may overshadow the benefits.

It’s important to mention that the six transactions per month rule, also known as Regulation D, was put in place by the Federal Reserve. However, as of early 2020, that rule has been removed indefinitely.

It’s now up to the financial institution to decide whether they want to enforce the rule or remove it. Having said that, many banks and credit unions will still charge you a fee on your MMA for going over six transactions per month.

When to use a money market account

Because of their liquidity and above-average interest, money market accounts are excellent vehicles for both short and long term savings goals, such as:

Emergency funds
Saving for a new home
Saving for a new car
Vacation funds
Wedding funds
And many other short and long term savings goals

When not to use a money market account

You should only use money market accounts for a handful of situations, such as those mentioned above. However, like most banking products, there is no one size fits all.

For example, if you are saving for retirement, you wouldn’t want to use a regular savings account. The interest you would earn on your retirement savings would be very small, which would be detrimental to building your long-term wealth for retirement.

Instead, you would use a retirement account, such as a Roth IRA or 401(k). These accounts are designed to maximize your return and increase your wealth exponentially, especially when given enough time.

Here are some examples of when you should not use a money market account:

Retirement savings: For retirement savings, you’d want to use a retirement account such as a Roth IRA, 401(k), or a Traditional IRA. Retirement accounts are a type of investment account that gives you access to thousands of different investments, including stocks, bonds, ETFs, mutual funds, and more.
Everyday banking: You should reserve everyday banking for checking accounts. Checking accounts allow you to make an unlimited amount of transactions without any fees or penalties. Money market accounts do have checking account features, such as a debit card and check-writing capabilities. The difference is that money market accounts are typically limited to six transactions per month, making them lousy for everyday banking.
Everyday investing: Money market accounts are not designed for everyday investing. Instead, you’ll want to use a brokerage account. Like retirement accounts, brokerage accounts are another type of investment account that gives you access to thousands of investments—something a money market account cannot do.

Money market account advantages

A money market account has many advantages, especially when compared to a traditional savings account. Let’s take a look at some of the pros of a money market account:

High annual yield percentage: The annual yield percentage (APY) on most money market accounts tend to be higher than traditional savings accounts.
Debit or ATM card: Money market accounts usually come with a debit or ATM card, similar to a checking account. This is convenient if you need to make purchases but don’t have the funds in your checking account.
Ability to write checks: Most MMA’s also come with checks, something typically reserved for a checking account. Having checks gives you more flexibility when paying for bills, groceries, and other services.
Federally insured: Money market accounts are federally insured up to $250,000 by the FDIC at banks and the NCUA at credit unions.
Your money is easily accessible: Because money market accounts often come with a debit card and checks, your funds are readily available to use.

Money market account disadvantages

Like any financial product, they all come with disadvantages. Here’s a list of the cons of a money market account:

Can require high minimum balances: Many money market accounts will require you to maintain a high balance to keep your account, sometimes up to $25,000. However, there are many MMAs that don’t have any minimum balance requirements.
Limited monthly transactions: Most money market accounts will limit you to only six transactions per month. If you exceed that limit, you’ll likely be hit with a fee for each transaction over six. For a traditional savings account, remaining below that limit is easier. However, because MMAs have checking account features such as a debit card and checks, you may find yourself going over the transaction limit frequently. And that’s money flying out of the window.

Lower interest compared to other bank products: Although MMA’s have a relatively high interest when compared to traditional savings accounts, they aren’t as high when placed next to other banking products such as CDs. Even high-yield savings accounts usually pay higher interest.

MMA vs. savings account

Money market accounts and savings accounts have a lot in common. In fact, it may be easy to think they are identical. They both pay you interest on your savings, are federally insured, have variable interest rates, and keep your money safe. So what makes these two accounts different, and when should you use one over the other?

The only difference between the two is that money market accounts have features similar to checking accounts. For example, many MMAs come with checks and a debit card. These are features that don’t exist in a regular savings account.

With that being said, when should you use one over the other? Generally, we recommend savings accounts for money you want to be stowed away and harder to access. This could be an emergency fund, long-term savings fund, or anything else that would require you not to touch the funds.

The harder the money is to access, the less likely you will make withdrawals for irrelevant expenses, such as a new pair of shoes.

However, if you need easy access to the funds and still want the benefits of a savings account, a money market account will work. Money market accounts will pay you interest on your savings (something most checking accounts don’t do) and allow you to use checks or a debit card for everyday transactions.

MMA vs. certificate of deposit (CD)

Unlike an MMA and savings account, which have a lot in common, MMAs and CDs don’t have much in common. For starters, CDs are a type of time deposit, which is an account with a pre-set maturity date. When you open a CD and deposit money into it, you cannot touch the money until the CD matures. CDs also have fixed interest rates, which means the interest is set and will not change during the course of the term.

In contrast, money market accounts have variable interest and are not time deposits. You can make withdrawals in your MMA account whenever you want, without paying an early withdrawal fee.

If you want to earn more interest and do not need immediate access to your money, a CD may be worth considering. CDs typically have more competitive interest rates than MMAs, especially longer-term CDs.

It’s important to note that the money you deposit into a CD is not liquid, which essentially means you won’t have easy access to it. Withdrawing your money from a CD before it matures will result in an early withdrawal penalty, which varies depending on the bank.

Conclusion

When choosing a money market account, it’s important you compare rates, fees, and other fine print at different financial institutions to make sure you are getting the best deal. You may even consider other banking products such as high-yield savings accounts if you are willing to sacrifice flexibility for higher interest yields.

Money market accounts can be an excellent tool to add to your financial arsenal. If you need an account that gives you the benefits of a savings account, with the flexibility of a checking account, then you’ve met your match.

Money market accounts for beginners