What Is a Money Market Account?

Updated: May 15, 2024

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Money market accounts combine the desirable aspects of savings and checking accounts. Like savings accounts, money market accounts earn interest on deposited funds. Some institutions even offer special money market rates if you have a different account open with them and are in good standing.

Money market accounts (MMAs) are an attractive alternative to traditional savings accounts because they provide a higher interest rate compared with regular savings accounts while still allowing you to access your funds with a debit card or checks.

How Money Market Accounts Work

Like savings accounts, money market accounts earn interest on your deposited funds. The bank determines the interest rate, which can fluctuate over time based on market conditions. Most money market accounts use a variable interest rate that compounds daily or monthly.

Money market accounts also come with some features found in checking accounts. You'll receive a debit card or check-writing privileges that let you access and spend your money when needed. However, banks typically limit the number of withdrawals and transfers you can make each month. Many banks follow the previous federal guideline of a maximum of six withdrawals or transfers per monthly statement cycle.

Transactions counting towards this limit include debit card purchases, clearing checks and transferring funds out of the account. The purpose is to distinguish money market accounts as savings vehicles rather than unrestricted checking accounts. Some banks may set higher withdrawal limits or charge fees for exceeding the monthly allowance.

Banks also typically require higher minimum balances for money market accounts than basic savings accounts. Minimum balances between $1,000 and $10,000 are common, and you may be charged fees if your balance falls below the minimum. Meanwhile, some online banks offer money market accounts with zero or low minimum balance requirements.

Higher Interest Rates Than Savings Accounts

Unlike a typical savings account, money market accounts allow you to invest your money in short-term, low-risk securities like government bonds, certificates of deposit (CDs) and other conservative investments. This enables them to offer higher interest rates than traditional savings accounts. Interest is typically compounded daily, meaning the interest earned is added to your principal balance each day, allowing that interest to earn interest on top of itself.

The interest rate is still variable and determined by the bank based on factors like the federal funds rate and the bank’s need to attract deposits. Rates can fluctuate over time based on market conditions.

Pros and Cons of Money Market Accounts

Like any financial product, money market accounts have pros and cons, usually determined by your intended use of the funds and your capacity to maintain a higher minimum account balance.

Pros of MMAs
Cons of MMAs

Offer the potential to earn higher yields compared to basic savings accounts

High minimum balance requirements compared to basic savings accounts, often $1,000 or more

Provide relatively liquid access to your money through debit cards and check-writing privileges

Many banks allow just six "convenient" withdrawals or transfers per month, which can limit their liquidity

The FDIC insures bank accounts for up to $250,000 per depositor, while the NCUA insures credit union money market accounts for the same amount

Typically offer lower yields than Certificates of Deposit (CDs) and what you could earn when investing in the stock market or other assets

Differences Among Money Market Accounts

While both are labeled as "money market accounts," bank money market accounts and money market mutual funds are not the same thing.

Unlike bank money market accounts, money market mutual funds invest pooled cash from investors into low-risk, short-term securities like U.S. Treasury bills and notes. You buy shares of these funds which aim to provide a place to hold and earn income on cash.

Money market mutual fund yields can fluctuate daily based on the performance of their underlying holdings. They don't provide check-writing or debit card access, and they're not insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), so there is a risk that the fund could potentially lose principal.

IMPACT OF MONETARY POLICY ON MONEY MARKET INTEREST RATES

Central banks, such as the Federal Reserve in the U.S., influence short-term interest rates, like overnight lending rates between banks, by adjusting their monetary policy and rates. When rates rise, the cost of loans in the banking system increases.

Ultimately, central banks use interest rate adjustments to indirectly steer broader financial conditions and achieve their inflation and employment targets over the medium-to-long run.

The effects of interest rate changes are usually clearest in the money markets. That's because central bank policy is transmitted to the rest of the financial system in the money markets.

For example, higher money market rates may raise returns at first, but they also tend to mean the central bank is tightening monetary policy. And tighter monetary policy could slow down economic growth over time.

Money Market Account Rates

Several factors determine interest rates for money market accounts. These include the broader interest-rate environment, the bank’s business model and the demand and supply of money. Banks that get a lot of their business from deposit accounts need to offer competitive rates to attract more customers.

Below are some money market rates offered by large banks in the U.S.:

Bank
Money Market Annual Percentage Yield (APY) as of Early May 2024

Ally Bank

4.20%

Sallie Mae Bank

4.65%

Vio Bank

5.30%

UFB Direct

5.25%

Brilliant Bank

5.35%

One main factor in money market rates set by banks is the broader interest-rate environment. When market rates are high, savings account rates, including money market accounts, also tend to go up. When market rates head lower, so do money market account rates.

Some money market accounts earn according to a balance tier, meaning your exact interest rate depends on your account balance. Higher balances usually earn at a higher rate. Money market account rates are variable, meaning they can change at any time. However, banks typically provide a notice period before implementing rate changes.

Growing Money in Money Market Accounts vs. the Stock Market

While money market accounts offer higher returns than traditional savings accounts, they typically yield lower returns compared to stock market investments.

Money market accounts are considered low-risk, as they invest in highly secure, short-term instruments. By comparison, stock market investments carry a higher level of risk due to market volatility. While stocks have the potential for higher returns, they also come with the possibility of significant losses.

The best way to grow your money depends on your individual financial goals, risk tolerance and investment time horizon. If you prioritize safety and liquidity, a money market account may be a suitable choice. However, if you have a longer-term investment horizon and are comfortable with higher risk, a diversified stock market portfolio could potentially offer greater returns.

Maximizing Interest on Money Market Accounts

Here are a few ways to maximize your interest earnings in money market accounts:

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    Shop Around for the Best Rates

    Compare rates from different banks and look for special offers to find the highest return on your money.

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    Leverage Tiered Interest Rates for Growth

    Money market accounts often offer tiered interest rates, where the rate increases based on the account balance. Leveraging these tiered rates can lead to additional growth over time.

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    Maintain the Right Balance

    The higher your balance, the more interest you will earn.

Money Market Relationship Benefits

In the banking world, the term ‘relationship banking’ refers to the practice of offering customers a broad range of financial products and services from a single provider. This can include checking accounts, savings accounts, loans, credit cards and money market accounts. Many banks offer what are known as ‘relationship benefits’ to their customers. These benefits aim to reward customers for their loyalty and for maintaining multiple accounts with the same bank.

One of the most common relationship benefits is the potential to earn higher interest rates on money market accounts. If a customer holds a checking or savings account with the bank, they may be eligible for these enhanced rates. This is a win-win situation for both the bank and the customer. The bank benefits from the additional business, and the customer enjoys a higher return on their money market account.

Comparing Money Market Accounts to Other Account Types

We compare money market accounts to a variety of other account types. Spreading money across several types of accounts can help with financial goal-setting and curb unnecessary spending.

Aspect
Money Market Accounts
Savings Accounts
Checking Accounts
CDs

Interest Rates

Generally offer higher interest rates compared to savings and checking accounts

Typically provide lower interest rates than money market accounts

Typically offer very minimal or no interest on the deposited funds since they are primarily meant for day-to-day transactions

Typically offer higher interest rates than money market accounts, especially for longer-term CDs. The rate is fixed for the CD term.

Accessibility and Features

Combine features of both savings and checking accounts, offering some level of check-writing privileges and debit cards

They usually do not come with check-writing privileges or debit cards

Provide easy access to funds through checks, debit cards and online transactions

Time deposits with a specific term. Access to funds before the end of the term can result in penalties.

Risk and Liquidity

Are considered low-risk, investing in secure, short-term instruments like CDs and T-Bills and insured up to $250,000

Are low-risk, providing a safe place to store funds and insured up to $250,000

Are low-risk, providing a safe place to store funds and insured up to $250,000

Are low-risk and insured up to $250,000. However, they offer lower liquidity due to the term commitment.

Fees and Minimum Balance Requirements

Many have higher minimum balance requirements and monthly fees

May have lower minimum balance requirements and fewer monthly fees compared to money market accounts

Often have lower minimum balance requirements and fewer fees compared to money market accounts

Usually do not have monthly fees, but early withdrawal penalties can apply if you access your funds before the term ends

How to Choose the Best Money Market Account

Choosing the best money market account depends on your needs and preferences. Here are some steps to consider:

1
Research Financial Institutions

Begin by researching different financial institutions that offer money market accounts. Look for reputable banks or credit unions known for competitive interest rates.

2
Compare Account Features

Compare the features of various money market accounts, including interest rates, minimum balance requirements, fees and additional benefits like check-writing privileges or ATM access.

3
Consider Relationship Benefits

Some banks offer higher interest rates or other perks to current account holders when opening a money market account. Check if your current bank provides any relationship benefits that can enhance your returns.

4
Review Account Terms and Agreements

Carefully review all the terms and agreements associated with the money market account. Pay attention to details such as transaction limitations, maintenance fees, penalties and any requirements to maintain a certain balance to maximize the benefits of the account.

5
Gather Necessary Documents

When opening a money market account, have the required documents handy. These may include government-issued identification, proof of address and possibly documentation related to your financial situation.

6
Complete the Application Form

Fill out the application form provided by the financial institution with accurate and thorough information.

7
Fund the Account

To activate your money market account, you will need to fund it with an initial deposit. To avoid incurring fees, make sure you meet the minimum balance requirement set by the institution.

FAQ About Money Market Accounts

Understanding the benefits and features of money market accounts is important when deciding to open one. Here are some of the most common questions about money market accounts.

How do you open a money market account?
What are the benefits of a money market account?
How is a money market account different from stock market investments?
Are money market accounts insured?
What's the difference between money market and savings accounts?
What's the difference between money market and CD accounts?
What is the typical minimum balance for money market accounts?
Is there a minimum deposit to open a money market account?
Are there high-yield money market accounts?
Can you lose money in a money market account?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego and his Master of Business Administration from Loyola Marymount University.


sources
Shield Insurance

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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