What Is a Money Market Account?

Let’s explore the rules, risks, pros, and cons so you can feel more confident putting your money to work with a money market account.

In this article, we’ll cover:

• How money market accounts work
• Pros and cons of money market accounts
• Money market accounts vs. other accounts

How money market accounts work

Most financial institutions like banks and credit unions offer money market accounts. Here’s how they work:

• You earn a variable interest rate on the balance in your account.
• Your cash is fairly liquid, meaning you can easily withdraw money, with some limitations on frequency. This is to balance your ability to take out money with the interest rate offered.
• You can generally write checks and use a debit card to spend money from a money market account.
• As long as your financial institution is a member of the FDIC (most banks and credit unions are), your money is insured by the FDIC up to $250,000.  
• Money market accounts may require a minimum balance or annual fees.
• There are often limits on the number of withdrawals you can make each month. 

Money market account interest rates 

Money market accounts aren’t intended to build long-term wealth, but rather to store your idle cash in a place where it can earn more interest than it would in a traditional savings account. 

Interest rates vary depending on the federal interest rate and the financial institution where you open your account. As of August 2023, the average interest rate for traditional savings accounts was 0.42%, while interest rates for money market accounts can reach 5% or more. It’s common for interest rates to fluctuate over time, and some institutions offer higher interest rates for maintaining a higher balance in your money market account.  

The example below illustrates why you might use a money market vs. a traditional savings account to earn more interest on your savings.

Not to be confused with a money market fund

While the names are very similar, a money market account shouldn’t be confused with a money market fund. Both are relatively low-risk ways to save money and earn modest returns. However, a money market fund is a type of mutual fund that invests in high-quality, short-term debt securities and pays dividends that generally reflect short-term interest rates. And unlike money market accounts, the FDIC does not insure money market funds.

Pros and cons of money market accounts

On the upside, money market accounts can be a great way to safely grow your money more quickly than with a traditional savings account. Plus, you get convenience and accessibility similar to a checking account. The downsides are that money market account rules often limit the number of monthly withdrawals you can make and impose monthly fees that could eat into your balance.

Advantages of money market accounts include:

• Higher interest rates: The typically higher interest rates of a money market account mean your funds grow more than they would with a traditional savings account.
• Liquidity and accessibility: Convenient features like check-writing privileges, debit cards, and the ability to withdraw or transfer money when needed ensure that your funds are easy to access. 
• Safety and security: Because they’re typically insured by the FDIC, money market accounts are generally considered safe investments. Your funds will be protected if the financial institution fails. 

Disadvantages of money market accounts include:

• Potential fees: Monthly maintenance fees or charges for falling below your minimum balance requirement could eat into your savings. 
• Limited check-writing abilities: Most money market accounts place limits on the number of checks you can write each month. If you need more frequent access to your funds, the limited transaction volume may be a drawback.  
• Opportunity cost of higher returns: While money market accounts generally offer higher interest rates than savings accounts, they often don’t provide the same returns you might earn if you put your money in higher-yield investments like stocks, bonds, or mutual funds. 

Money market accounts vs. other deposit accounts

Money market accounts, checking accounts, savings accounts, and certificates of deposit (CDs) are all deposit accounts. They share some of the same security features and growth opportunities, but there are key differences in the rules and functions of each account.

Checking accounts

Checking accounts allow you to store and have easy access to your money for everyday transactions, but they usually offer far lower interest rates than money market accounts; many don’t pay any interest at all. Generally, checking accounts allow unlimited debit purchases, ATM withdrawals, and check-writing privileges as long as you have a sufficient account balance. Money market accounts typically limit withdrawals. 

Savings accounts

Like money market accounts, savings accounts allow you to deposit money, earn interest, and save for future financial goals. Both types of accounts offer a higher interest rate than checking accounts, though savings accounts tend to earn lower interest. Generally, you can withdraw funds at any time from your savings account, but you may face penalties if you exceed a certain number of withdrawals per month. Savings accounts do not typically provide check-writing or debit card options.

Certificates of deposit (CDs)

CDs are deposit accounts that hold a fixed amount of money for a specific period of time, usually between six months and five years. In exchange for keeping your money in the account for the full term, the issuing bank pays interest. When you redeem your CD, you receive the money you originally invested plus the interest. CDs tend to pay higher interest rates than money market accounts, but this is a result of their fixed terms. Because of these fixed terms, you’ll usually incur penalties if you withdraw the money from your CD before the predefined period expires.

Choose the path that fits your goals

A money market account could be a good idea if you’re looking for a low-risk option and want to grow your money for a short-term goal. This kind of deposit account can be a useful tool when you’re looking for ways to save money because instead of letting your money sit idle, you put it to work earning interest.   

And if you’re looking to grow your money for longer-term needs like retirement, Stash can help you start investing with confidence.

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