Money market accounts (MMAs) are akin to savings accounts offered by banks, credit unions, and other financial institutions. But MMAs are fancier. Unlike savings accounts, money market accounts pay much higher interest rates and come with better perks, such as checkbooks and debit cards.
Like a savings account, however, your MMA is insured by the federal government. Over the last 10 years, MMAs lost their attraction as interest rates fell to historically low levels and the stock market boomed. But as interest rates (on mortgages, car loans, etc.) rise once again and the stock market well within choppy waters, some consumers are turning to MMAs as a safe-haven to protect their cash and earn a little interest.
How Does a Money Market Account Work?
It works much like a savings account. Sometimes it’s called a money market deposit account or money market savings account. Opening an MMA is easy, and some accounts require no money down. Usually, though, you’ll need $100 to open an account in person or online.
With your new account, you decide when to make deposits (no matter how big or small) and when to withdraw your money.
However, the government normally limits MMA and savings account withdrawals to six per month, whether via check, debit transaction, or electronic transfer, although this rule was recently suspended in the wake of COVID-19's economic impact. That six-transaction limit doesn’t apply to ATM withdrawals and payments by telephone.
Most money market accounts require balance minimums. If you make more withdrawals than allowed or don’t maintain your required balance minimum, banks typically charge a small monthly “maintenance” fee. Some banks may go as far to convert your MMA to a savings account. Others may even close it down.
Interest, expressed as an annual percentage yield (APY), is compounded daily or monthly. The sweet dividend — interest payments — is typically paid out monthly.
Benefits of an MMA
MMAs are good for anyone who wants a safe and accessible place to stash and earn some interest (higher than savings accounts) on their money. But people who open MMAs usually have short-term goals in mind. They may want to build a large pool of money to use in sudden emergencies, for example. Or hold cash in reserve between investment opportunities.
Let’s focus on safety first. Money market accounts from a bank are backed by the Federal Deposit Insurance Company (FDIC) up to $250,000 per account. Credit union customers with MMAs are backed by the National Credit Union Administration (NCUA).
How about accessibility? Most people who work and regularly receive a paycheck funnel their earnings into a plain old checking account that never pays any APY. So instead, why not stash your money in an MMA that pays interest and allows you to write checks?
If you need to write a lot of checks each month, you can open two MMAs with low balance minimums to get around the six-transaction-a-month limit. Or you could open a high-yield checking account.
And then, of course, there’s the biggest benefit of MMAs: a higher APY than savings accounts.
As of summer 2020, the national average for savings accounts is 0.06 percent, compared with 0.08 percent for MMAs, according to the FDIC.
But those average yields are pathetically low and very misleading, given that there are dozens of well-known banks offering MMAs paying APYs as high as 2.25 percent. Do your homework.
A Money Market Account vs. a Money Market Fund
Main Street uses MMAs and Wall Street uses money market funds, which are mutual funds. Like MMAs, people open money market funds (MMFs) to hold their money for the short term. And typically, investors use MMFs to stockpile cash as they wait to execute the next big company, stock, or real estate purchase. MMFs are low-volatility investments. Some even generate income that’s tax-exempt.
But keep in mind that money in these funds aren't FDIC insured. Another complaint about MMFs is that because they’re mutual funds, they’ll charge you an annual expense ratio (or management fee) on the money in the account.
MMFs are commonly used by investors. I’m quite familiar with them — I have one in my individual retirement account (IRA) and another in my brokerage account. I need these funds to get money into my IRA and brokerage account so that I can buy and sell stocks, exchange-traded funds (ETFs), and mutual funds. It's like a transfer station.
My money never sits in a money market fund for more than a day or two.
The account in my IRA levies a 0.41 percent expense ratio. That’s an annual fee of $4.10 on every $1,000 held in the account. And the APY is substandard. Any thoughts about using these funds as savings vehicles are out of the question.
Why MMAs Aren’t for Everyone
If you need a piggy bank to fund regular, monthly expenses, then a money market account might not be the best choice. MMAs may seem to make sense if you’re saving for near-future purchases like a new car or a vacation. But there are also other options you should consider.
For example, certificates of deposit (CDs) — another savings product — offer higher interest rates than MMAs. And like MMAs and saving accounts, CDs are FDIC insured.
The only problem with CDs is accessibility. When you open a CD at your bank, you agree to a “term” dictating how long the bank or credit union can keep your money. Terms can range from one month to 10 years, and the longer the term, the higher the APY.
In my opinion, CDs are a better option than MMAs if you’re saving for a short-term goal (two to five years) and don’t want to touch your money as it grows. If you cash out your CD before the term expires, you’ll lose any interest that the money has earned, and you may have to pay a penalty.
Are Money Market Accounts Worth It?
To be honest, I’ve never been attracted to MMAs and have found that online savings accounts sold by major banks carry competitive interest rates. That’s why I have an online savings account linked to my wife’s and my checking accounts, as well as to my IRA and brokerage accounts.
I first opened the account in 2001. No matter my balance, I’ve never paid a fee or penalty. I can access my money within 24 hours. When money arrives in my checking account, I quickly shoot it over to my savings or brokerage account. Don’t want my money sitting there earning no interest at all!