When you’re looking at bank accounts and see products like a money market account, you may be confused about what it’s for. A money market account is very similar to a savings account but with a few subtle differences.
Read on to find out the specifics of a money market account and whether you should consider opening one.
What Is a Money Market Account?
Think of a money market account as a hybrid savings and checking account. First, you’ll get better interest rates than you would with a checking account. Sometimes, a money market account has higher rates than savings accounts do, though that’s starting to change if you’re looking to open an account at an online bank. Some places also give you a debit card and the ability to write checks from your money market account. However, it may mean you have a higher minimum deposit amount to open or maintain the account.
Furthermore, you’re limited in the number of transactions you can make each month. Federal regulations mandate a maximum of six withdrawals each month. Different financial institutions may impose different limitations, but never more than six. If you do go over the number of permitted number of withdrawals, your bank may deny the transaction, close your account or charge you a penalty fee.
When you deposit money into a money market account, the bank can use the funds in low-risk investments like government securities or certificates of deposit. Don’t worry – your money is insured by the FDIC or NCUA up to federal limits (it’s currently at $250,000) so you won’t risk losing your deposit.
What’s the Difference Between a Money Market Account and Other Accounts?
First, a money market account is not a money market fund. A money market fund is a type of investment that’s not insured, meaning you can lose value. To open a money market fund, you’ll need to go through a broker or brokerage firm, which may or may not be attached to your bank or credit union. These funds are a fairly conservative type of investment account, but they still carry risk like other types of brokerage accounts. A money market account, on the other hand, is insured either by the FDIC or NCUA, so you’re not at risk of losing your cash.
Second, just because you can get a debit card or check writing capabilities doesn’t mean a money market account is better than a checking account. Remember, you’re limited to six withdrawals a month, just like a savings account. Checking accounts, on the other hand, give you the ability to make frequent withdrawals, but you may not get an attractive interest rate compared to a money market account. Checking accounts typically have much lower interest rates (if they accrue interest) to make up for the fact that your cash is more accessible than it would be in a money market account.
A money market account is also different than a certificate of deposit (CD) because the money is more liquid. A CD typically requires you to make a fairly large deposit and set it aside for months or years. The point of a money market account is to allow you to take advantage of higher rates and stash away those funds for the next little while. It’s best for those interested in setting aside money for short-term goals.
Who Should Open a Money Market Account?
If you’re looking for a safe place to deposit money, both savings accounts and money market accounts can be a great idea. However, there are some instances where it may be a better idea to open a money market account.
Other reasons to open a money market account include:
- You want to be able to access your money, such as with a debit card and checks, but not frequently.
- You want higher interest rates than you can get with a savings or checking account.
- You plan on depositing a fairly large sum of money and want it insured so that you’re not at risk of losing your funds.
- You want a place to store an emergency fund, one that’s separate from your daily accounts but still accessible so that you can write a check in case you need to pay an unexpected bill.
That’s not to say that savings accounts don’t have competitive interest rates. If you’re not bothered with check writing capabilities, do some research to see which type of account will work best for you before deciding on one.
How Do I Choose a Money Market Account?
If you’ve weighed all your options and decided that a money market account is worth opening, then you should look into which one is best for you. Ideally, you’ll want to find one with good rates as well as no or minimal fees. Many online banks offer fairly competitive rates and perks such as free checks and mobile apps so you can check your money on the go. Once you’ve narrowed it down to a few choices, check to see what their minimum balance requirements are. Because of their higher interest rates, money market accounts tend to have higher balance requirements. While some may require amounts around $1,000, some can be as high as $10,000 or more.
Money market accounts aren’t for everyone, but it may work with your financial goals as a way to grow your cash safely.
If you aren’t sure if a money market account is right for you, a financial advisor or bank representative can help you find a solution for your specific situation.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.