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Understanding Money Market Accounts: A Comprehensive Guide

If you’ve ever been frustrated by the low (or nonexistent) interest rates you earn on your regular savings or checking account, or wished you could write a check every once in a while from your savings instead of transferring funds, a money market account might be for you.

How Does a Money Market Account Work?

A money market account (MMA) is a deposit account that earns interest like a savings account but allows you to write a limited number of checks (or sometimes make debit transactions) for convenience. Interest rates are typically higher than for traditional savings accounts, and MMAs are available at a wide range of banks and credit unions.

Here are a few features you’re likely to find on MMAs:

• Available at most banks and credit unions
• Higher interest rates than a traditional savings account
• Convenient transaction tools like checks and debit cards
• Simple to open and operate
• Many have minimum balance requirements (and, if you don’t meet them, fees)
• Many also have transaction limits (example: six checks or debit transactions per month)

Pros and Cons of Money Market Accounts

Pros of Money Market Accounts

• Easy access to money: Check writing and debit cards make money markets user-friendly in more situations.
• Interest on money that’s usually interest-free: Money in your MMA might otherwise be sitting in your checking account earning nothing.
• Low risk: MMA funds don’t lose value like an investment might, and your money is insured up to $250,000 per account holder.

Cons of Money Market Accounts

• Moderate gains: You might earn even more interest in a high-yield savings account or certificate of deposit (CD).
• Limited withdrawals: Exceeding your transaction limit could lead to fees, which can reduce or eliminate what you earn in interest.
• Minimum balance requirement or minimum opening deposit: You may need a certain amount of money to open a money market account, and you may need to keep your balance above a threshold to avoid fees.

How to Open a Money Market Account

Opening an MMA is as simple as opening any bank or credit union account. Follow these basic steps:

1. Choose a Bank or Credit Union

You may want to start with your current financial institution, or shop around for a bank or credit union that offers competitive interest rates, low (or no) fees, account requirements you can work with and easy branch or online access. If you’re comfortable using online and mobile banking, an online bank may work for you.

2. Gather the Information You’ll Need

Standard requirements for opening an account include the following:

• Your name, address, phone number and email
• Social Security or individual taxpayer identification number
• Valid government-issued photo ID (driver’s license, passport or military ID)
• Second form of ID, such as a Social Security card, birth certificate or bill with your name on it

3. Fund Your Account

Bring a check or use your debit card or bank account number to transfer money from your existing account into your new MMA. You may need to meet a minimum opening deposit; otherwise, consider starting small with $25 to $50, just to make sure your account is set up properly and your transfer goes through without incident.

Alternatives to Money Market Accounts

MMAs aren’t the only accounts that pay interest or allow you to transact. You may prefer these MMA alternatives if they’re more in line with your needs:

High-Yield Savings Accounts

As their name suggests, high-yield savings accounts pay top interest rates on your savings balance. Consider shopping online-only banks for competitive rates on high-yield savings.

CDs or Share Certificates

CDs or share certificates (as they’re often known at credit unions) pay a relatively high fixed rate of interest for a fixed term. For example, you might get 4% interest for 12 months, but in exchange you agree not to withdraw your initial deposit until the 12 months are up. CDs pay competitive interest but are, clearly, not ideal for people who need to transact.

Interest Checking Accounts

Although interest checking accounts often come with minimum balance requirements and a raft of potential fees, they can work for people who want to earn interest on their checking account balances while making unrestricted transactions.

Money Market Funds

Money market funds may sound similar to money market accounts, but they are mutual funds that invest in low-risk, short-term assets like government debt and CDs. They may be an alternative if you’re looking to make some gains on your savings without too much risk, but because they’re investments and not bank accounts, they aren’t insured.

FAQs

What Is a Money Market Account Used For?

A money market account is used for earning interest on your savings while having the flexibility to write checks or use a debit card for transactions.

What Is the Minimum Balance for a Money Market Account?

The minimum balance for a money market account varies by institution, but many require a minimum balance to avoid fees.

Are Money Market Accounts FDIC Insured?

Yes, money market accounts are FDIC insured up to $250,000 per account holder.

Can You Lose Money in a Money Market Account?

No, money market accounts are low-risk and your funds are insured, so you won’t lose money like you might with an investment.

The Bottom Line

Under the right circumstances, money market accounts may be the Goldilocks of bank accounts: They offer some transaction capabilities and moderate interest in a single, flexible account. If you’re interested in opening a money market account, taking the time to shop around for the best combination of interest rates, minimum balance requirements, fees and features could save you money and help you find the account that best fits your needs.

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