Money Market Accounts: How Do They Work?
Are you looking to make the most of your savings? When researching the topic, you’ve probably come across a number of account types. Money market accounts (MMA) are a widely used savings vehicle for many because of their benefits and features. But is a money market account the best choice for you?
Let’s dive into what exactly money market accounts are, how they work, and pros and cons you should know.
What is a money market account?
A money market account is an interest-earning account that may be offered by a bank or credit union. While the amount of interest you will earn is based on the MMA account rates set by your financial institution, it is usually higher than those of traditional savings accounts. Plus, money market accounts typically have extra features that allow account owners easier access to their funds like checks or a debit card.
It's important to note that money market accounts may have more restrictions and requirements than your regular savings or checking account.
How do money market accounts (MMAs) work?
Simply put, a money market account combines the interest-earning benefits of a savings account with the easy-access convenience of a checking account.
Earn interest with your MMA
Put your savings to work and earn interest in an MMA; growing your capital with money you don’t plan on using immediately. Many investors and savers prefer an MMA because the interest rates and annual percentage yields (APY) tend to be higher than traditional savings accounts. This interest will compound, adding to the amount you can earn each month.
Keep in mind, your MMA account rate may also be tiered by how much you deposit or variable so the amount you can earn will fluctuate as market conditions shift.
Access your funds with your MMA
While you are earning interest, your funds are not locked away and you can still access your money.
Some financial institutions offer MMAs with features similar to checking accounts like a debit card for withdrawals, deposits, and transfers at ATMs, as well as checks to write against your account balance. Typically, you will still be limited to a certain number of withdrawals per each statement period.
Top Tip: Make your MMA work for you
In order to save as much as possible, you may need to:
Maintain a minimum balance to remain active and avoid service charges or fees
Deposit more in order to save more because some accounts have tiered interest rates
How do I choose a money market account?
There are a lot of money market accounts out there — but not all are created equal. Do your research and consider the following based on your needs and objectives:
Find the best APY: Since APY will determine how much you can earn with compound interest throughout the year, it has a big impact on how much your savings can grow.
Be aware of account restrictions: See if the account you’re interested in has minimum balance requirements to earn the best possible interest or avoid a fee.
Know the fees going in: If you’re trying to take advantage of an opening bonus or just looking for the very best account for you, be sure to find out if there is a fee for closing the account within a certain amount of time after opening it. Read the fine print for other fees like maintenance, transfer, excess withdrawal, and inactivity fees.
Get the access you need: Not all MMAs come with both checks and a debit card and some will have different limits on the amount of withdrawals you can make. Make sure the account you want meets both your savings goals and spending needs.
Remember your other accounts: Some banks will reward you for opening multiple accounts with them. Or, if you have idle funds in an investment account and don’t want to open a whole new account, you may consider putting your funds into a money market account that is part of a Cash Sweep fund like moomoo’s Cash Sweep program.
How to open a money market account
Opening a money market account can be a simple process once you find the right financial institution for you.
Remember: Look at a number of high yield money market accounts available at your local banks and credit unions. Don’t forget to include online banks that may offer better terms than your regional institutions.
Step 1: Provide required documentation.
In order to provide proof of identity and financial information, you may need to show any number of the following:
Driver’s license or state ID
Birth certificate
Social Security number
Phone number
Proof of address
If you are opening an account at a local brick-and-mortar location, you may need to print these items while online banks may only require digital forms.
Step 2: Set up online banking
For easier account use, you may want to set up online banking so you can make transactions, check your balance, and more with a mobile app or website. This step often requires you create a username and password that you can use across the different platforms.
Step 3: Fund your account
Make a transfer from your current account to deposit funds into your new money market account. You may also want to set up an automatic direct deposit so you can build your savings and make the most of compound interest.
Pros and cons of MMAs
When considering if a money market account is right for you, keep in mind the different pros and cons, and if one outweighs the other when looking at your goals.
Pros of MMAs
Higher interest rates than typical savings accounts
Easier access to funds with potential use of debit cards and checks
Easier short-term savings without waiting periods before being able to withdraw funds
Insurance protection from the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA)
Cons of MMAs
You may be limited to a certain number of withdrawals per statement period
Some accounts have minimum account balance requirements to avoid fees or account closure
There may be fees for withdrawals, transfers, and other actions
You may not always earn the highest amount of interest because of variable and tiered interest rates
Money Market Accounts vs. other savings accounts
There are a number of savings accounts you may want to compare directly with money market accounts when deciding which is best for you.
High-yield savings accounts
Exactly as the title suggests, a high-yield savings account (HYSA) is a savings account that earns more interest for a higher APY. The lines between a HYSA and MMA have become more blurred in recent years and some are very similar or offer the exact same features. Both can be used to support short-term savings goals, but MMAs may give more access with checks or a debit card.
Certificates of Deposit (CDs)
A Certificate of Deposit (CD) is a type of savings account as well, but it requires that you deposit money for a specific amount of time, called a term. Usually, the longer the term, the higher the yield you can earn. While you can withdraw funds before the term is over, you might face penalties and fees. CDs may be better suited to longer-term savings goals where you have no need for the funds before the term ends.
Traditional savings accounts
This type of account is the savings account you can open at any local bank or credit union. While you can earn interest, it is very limited and you typically do not have a debit card or checks that allow access to your funds. You may however, easily link your savings account to a checking account if they are both with the same bank.
Checking accounts
This account allows you to deposit money that you can withdraw at any time by writing a check, using a debit card, or making a transfer. There are no limits on how often or how much you can withdraw. However, you will usually not earn interest with this type of account.
FAQs about money market accounts
1. Should I open a money market account?
A money market account may be a good solution for you if you're saving for a particular expense in the near term, but still want to earn more interest than you could with a traditional savings account.
For example, if you’re saving up for a short-term goal that requires access to your money (for instance, a down payment or emergency fund), you can still earn interest as you save. Plus, with an MMA, you won’t face withdrawal restrictions and higher fees or taxes as you would with accounts better suited for retirement or long-term savings.
2. What’s the difference between a money market account and a money market fund?
A money market account is a savings account you open with a bank or credit union while a money market fund is a mutual fund you invest in. A mutual market fund invests in short-term money market instruments and is not federally insured, unlike MMAs which are insured by the FDIC or NCUA.
3. How much money do you need for a money market account?
Depending on the financial institution you choose, the amount may be much higher than traditional savings accounts. Some accounts will have a minimum account balance of $5,000 or more to avoid maintenance fees or account closure.