What is a money market account?

In a nutshell

Money market accounts (MMAs) offer the best of both checking and savings accounts. You earn a higher rate of interest on your money, and the MMA functions like a checking account. In this article, you'll learn how a money market account works, the pros and cons of using one, and alternatives to consider.

How does a money market account work?

A money market account works very similarly to a checking account. You can deposit and withdraw like a checking account, and the account allows ACH, EFT, and wire transactions. Many banks provide a debit card, and some offer check-writing abilities.

Money market accounts earn higher interest rates than checking or savings accounts. However, some banks charge higher monthly fees or have larger minimum deposit requirements to open or waive monthly fees compared to other deposit accounts.

Your bank may limit the number of transactions per month but is no longer required to under Federal Reserve Reg D. If limited, thes transactions include transferring to another account, debit card purchases, bill pay, electronic withdrawals, and checks.

What are the pros and cons of a money market account?

Pros

• Higher interest rates. Money market accounts generally offer some of the best interest rates for liquid deposit accounts. Some money market accounts offer higher rates for larger balances.
• Access to a debit card. The bank issues customers a debit card to access their money market account. You can use the debit card for deposits, withdrawals, or to make purchases as if it were a credit card. All transactions are deducted directly from your money market account.
• Write checks. Some banks allow customers to write checks from their money market account as if it were a checking account. Keep in mind that you may be limited to six transfers or external withdrawals per month.

Cons

• Limited transactions. Depending on the policies of your bank, you may be allowed no more than six withdrawals or transfers per month. If you go over this limit, the bank may charge additional fees, decline the transaction, or close your account.
• Monthly fees. Banks may charge monthly fees for their best money market accounts. However, you may be able to waive the fee based on your account balances at the bank.
• Minimum balance requirements. Some banks have higher minimum balance requirements compared to checking or savings accounts. These requirements may be to open the account or to waive the monthly service charges.

Money market accounts versus alternatives

Money market accounts are just one of the many options that banks offer for your money. Additionally, there are other options from other financial institutions that offer similar benefits. Here are some money market account alternatives that you should consider.

Interest-bearing checking accounts

With the growth of online banks, more checking accounts offer interest to customers than ever before. Many of them waive fees and earn interest rates that are competitive with savings and money market accounts.

Savings accounts

Savings accounts offer modest interest rates and a safe place to deposit your money. They tend to have low monthly fees and lower minimum balance requirements. Some customers link their savings accounts to checking accounts for overdraft protection.

High-yield savings accounts

Many online banks offer high-yield savings accounts that compete with interest from money market accounts. They generally have lower monthly fees and minimum balance requirements, but you won't be able to write checks on the account.

Money market mutual funds

Investment companies offer money market mutual funds that are similar to money market accounts. The biggest difference is that they are not FDIC-insured, so be sure to stick with a reputable company with strong financials.

Certificates of deposit (CDs)

CDs tend to offer higher rates than money market accounts when you agree to longer terms. However, banks usually charge a penalty if you need to withdraw money before the CD matures.

Are money market accounts worth it?

Yes, money market accounts are a good idea for investors who want easy access to their money but also want to earn a competitive interest rate. Some banks have low monthly fees and minimum balance requirements, which makes those accounts attractive to a wide array of customers. However, other banks require larger deposits to access their money market accounts with the best rates and features.

Remember that, depending on the bank, you may need to keep your money market account transactions to a minimum to avoid fees or account closure. Even though they are not required to do so, many banks limit customers to six transfers or withdrawals per month. Because of this, money market accounts are generally not meant to replace a checking account for people with numerous transactions each month. If you have minimal transactions and want to earn more interest on your money, a money market account is worth it.

The Buyline roundup

A money market account is a hybrid deposit account that combines the flexibility of a checking account with the earning power of a savings account. Money market accounts typically have access to a debit card and can perform many of the same transactions as a checking account. However, you may be limited to six transfers or withdrawals per month.

These accounts have higher interest rates than savings accounts, but some banks charge higher monthly fees or require larger deposits to gain access to them. If you can avoid the monthly fees, money market accounts are a solid option to earn interest on your money.