March 18, 2024

What’s a Money Market Account? The Pros, Cons, and How It Works

If you’re looking to grow interest on your money while holding onto some spending flexibility, you might consider a money market account. These accounts offer a blend of savings and checking account benefits, making them a valuable option for personal finances.

Learning what a money market account is could be the first step toward a lucrative decision for your financial goals. Here’s everything you need to know about this account type, including pros, cons, and alternatives.

What’s a money market account, exactly?

A money market account (MMA) is a type of account that allows people to deposit or withdraw money while earning interest on the available balance. Many banks and credit unions offer these accounts as a safe and flexible way to save and manage money. Typically, along with earning interest, an MMA allows account holders to write checks, withdraw from ATMs, and use a debit card tied to the account.

How does a money market account work?

MMAs give account holders the ability to save money while keeping their funds “liquid” (easy to turn into cash quickly). The funds you deposit into an MMA can earn you interest, but your interest potential reduces if you withdraw money. How much you can earn ultimately depends on your balance and the account’s annual percentage yield (APY), which is the interest rate at which money can grow over a year’s time.

MMAs often come with better APY rates than a typical savings account. For this reason, high-yield MMAs are a great option for those seeking increased interest earnings alongside quick access to their funds.

While these accounts offer convenient savings benefits and flexibility, restrictions still apply. Federal regulations limit certain types of withdrawals and transfers — like debit charges or checks — to six total per month on savings accounts. If you exceed these limitations, your bank or credit union could charge you fees or even revert your account to a checking account. Some MMAs also have minimum balance requirements or monthly maintenance fees, but this varies by bank or credit union.

Pros and cons of money market accounts

If you’re trying to decide if an MMA is the right choice for you, it’s important to weigh the benefits and potential drawbacks to make a decision that supports your financial goals. Here are some pros and cons to consider:

Pros

- Higher interest rates: MMA rates are usually higher than traditional savings accounts (though this isn’t always guaranteed). If you’re able to open an account with a favorable interest rate, you could grow your funds more efficiently over time than you might with a traditional savings account.

- Access to your money: The ability to write checks and use debit cards gives you convenient access to your money. These features make MMAs more flexible than other savings accounts that usually don’t offer check-writing or debiting options.

- Safety and insurance: Banks that issue MMAs carry insurance from the Federal Deposit Insurance Corporation (FDIC), and credit unions offering MMAs receive insurance through the National Credit Union Association (NCUA). While the insurance providers are different, both entities are government-funded and will reimburse account holders if the financial institution responsible for their account loses their funds (usually up to $250,000).

Cons

- Minimum balance requirements: Unlike some savings accounts, MMAs require a minimum balance — usually at least $2,500, though some may have higher requirements.

- Transaction limits: Since MMAs are savings tools first and foremost, they often come with limitations on how much and how often you can withdraw to limit drastic balance changes. If you exceed these restrictions, like making withdrawals too frequently, your financial institution may charge you a fee or even turn your MMA into a checking-only account with no interest earnings.

- Variable interest rates: The interest rates on MMAs can change over time based on inflation, fluctuations in central banking policies (like Federal Reserve policies in the U.S.), and other economic factors. This is different from fixed-rate products, which offer a set interest rate for a specific period of time.

Money market accounts versus savings accounts and other financial products

MMAs share a lot of similarities with other savings and money management accounts, but they aren’t the same. Here are some of the key differences between MMAs and other financial accounts:

- Savings accounts: Unlike MMAs, savings accounts typically have lower interest rates and don't offer debit card or check-writing privileges. They also tend to have fewer withdrawal restrictions and lower minimum balance requirements.

- Checking accounts: The intent of a checking account is to have easy access to your money, no matter how frequently you need to make withdrawals. While most checking accounts lack interest incentives, they do offer zero transaction limits, which MMAs can't offer due to federal regulations.

- Mutual funds: Mutual funds involve investments in securities (tradable assets like stocks and bonds), which come with higher risk and potentially higher interest returns. These accounts often involve fees for operational costs, and if you need to sell shares of your mutual fund for cash, it can take a few days, meaning your money is less liquid than an MMA.

- Money market funds (MMFs): The name of this account type makes it easy to confuse with an MMA. While they both accrue interest and offer similar checking features, MMFs come from investment firms, not banks or credit unions, and have the potential to offer higher interest.

How to choose the right money market account for you

When you select an MMA, you’ll need to review a few factors to make sure the account lines up with your needs and financial goals. Here are a few steps to follow as you compare MMAs:

1. Explore APY options: Look for competitive APYs to save more efficiently. Banks like Ally Bank, Quontic, and Zynlo are currently offering around 5% APY, which is on the higher end of interest rates. Remember, a higher APY means more earnings on your deposit.

2. Review potential fees: Be aware of fees for monthly maintenance, excessive withdrawals, or falling below the minimum balance threshold. These can impact your earnings and potentially cancel out the benefit of earning interest.

3. Check minimum balance requirements: Some MMAs require a minimum balance to earn the advertised APY or charge fees if your account slips under the minimum. If you can’t deposit or maintain the required balance, you’ll want to look elsewhere to avoid unnecessary charges.

4. Consider your access to funds: Think about how often you'll need to pull funds from your account and see what kind of access you can get with different MMAs. If you rely on check-writing or debit transactions, evaluate the account limitations to determine if you can stick to those requirements.

5. Seek out safety and insurance: Check that your MMA has FDIC or NCUA insurance for the safety and security of your funds.

6. Review online banking options: Many banks now offer digital banking features for MMAs, providing convenience and easy account control. If you prefer online banking over in-person banking, make sure your chosen financial institution offers the tools you need to manage your account.

5 alternatives to money market accounts

MMAs are a popular choice for many people looking to build up their savings while keeping their money liquid, but they may not suit all your financial goals and needs. If you need more flexibility with your money or want to prioritize savings over access, there are other financial instruments that might suit your needs better. Here are six MMA alternatives to consider:

1. Certificates of deposit (CDs)

CDs are time deposits, meaning you deposit money into them and agree not to withdraw from them for a certain period of time. In exchange for not moving money until that time period ends (aka the “maturity date”), the bank or credit union will give a higher fixed interest rate. Because these accounts have restricted access until they mature, they’re only suitable for long-term saving goals, like starting a retirement fund or saving for a down payment on a home.

2. High-yield savings accounts

High-yield savings accounts offer higher interest rates than traditional savings accounts, making them ideal for those who want higher returns without the time restrictions of CDs. They lack checking and debiting capabilities, so you can only access funds through electronic transfers or ATM withdrawals.

3. Cash management accounts

A cash management account offers features similar to an MMA, like check-writing, debit card access, and favorable interest rates, but they’re typically offered through different types of investment firms rather than banks or credit unions.

4. Checking accounts

For day-to-day transaction needs, you can’t beat the flexibility of a checking account. While they don’t accrue interest like MMAs, you can access your money whenever you need it without limitations. There are also plenty of checking account options that don’t charge a monthly fee or require a high minimum balance (if any).

5. Credit union accounts

Credit unions are nonprofit organizations run by the very members that make up the union. This setup allows account holders (aka members) to prioritize benefits over generating profits like for-profit institutions. As a result, they can typically offer lower fees and higher interest rates, making these credit union accounts a great alternative to traditional bank accounts or MMAs.

Don't let unexpected expenses catch you off guard

You work hard to earn and save your money, but there are times when life may throw a financial curveball and you’ll need immediate access to your funds. While flexible accounts like MMAs offer convenient access to your money, they’re not your only option for tapping into your funds.

If you encounter a situation where you need to use your earnings right away, EarnIn’s Cash Out tool can help you access your pay as you work without the interest of a loan or the high fees of a cash advance. You can get up to $100 a day and up to $750 every pay period with no interest, no credit check, and no mandatory fees. With EarnIn, you’ll get a variety of tools and resources to help you reach your money goals and work through financial challenges, no matter what life sends your way.

Download the EarnIn app today and experience money at the speed of you.

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