What Is a Money Market Account? Should I Get One?
Traditional savings accounts aren’t the only place to store a nest egg. Money market accounts, also known as money market deposit or money market savings accounts, can offer some savers a better return.
Money market accounts are a special type of account offered by some banks and credit unions. They aren’t to be confused with money market funds, which are investment vehicles and may lose value depending on market performance.
The most important things to note about a money market account include:
- It’s federally insured, if the financial institution is. An account at a bank is typically backed by the Federal Deposit Insurance Corp. while at a credit union, the insurance comes from the National Credit Union Administration. In both cases, there are $250,000 maximums.
- Account holders can make no more than six “convenient” transfers or withdrawals per month, under the Federal Reserve’s Regulation D. That doesn’t include withdrawals by ATM, in person, by mail, by messenger or by telephone.
- Like a savings account, money market accounts pay interest, but they typically require a relatively high minimum balance to avoid fees.
- Some money market accounts let you write checks that draw on the balance, but those come under the Regulation D limit.
Money market accounts vs. alternatives
Most savers will be primarily concerned with the return, or annual percentage yield (APY), they can earn on an account. Money market account rates typically perform as well or better, on average, than savings accounts and very short-term certificates of deposit. Here are the comparative average APYs:
- Money market accounts: 0.15%
- 3-month CD: 0.15%
- Savings account: 0.13%
- Interest checking: 0.08%
The higher yield comes with certain requirements, though. The average minimum balance required for a money market account is much higher than any of the alternatives.
- Money market accounts: $7,308
- CDs: $2,547
- Interest checking: $946
- Savings account: $1,332
When it’s the best choice
A money market account may be an appropriate choice for those who:
- Have significant savings, let’s say $5,000 or more, and can maintain a balance of at least that much per month.
- Need the ability to access their money occasionally, making CDs a less desirable option.
- Are looking for a risk-free account in which to store excess cash.
Here’s an example: Let’s say you have a money market account that has an APY of 0.5% and requires a minimum balance of $5,000, with a fee of $10 for dropping below and an additional $10 fee for “convenient” withdrawals in excess of the six-per-month limit. The one-year return on $5,000 would be $25. Just three fees of either type would wipe out the earnings and leave you paying a net $5, so pay close attention to the details before opening an account, and keep an eye on your balance and transactions afterward.
The bottom line
Money market accounts can be a great way to help your savings grow, but they aren’t the best option for everyone. Consider minimum balance requirements, potential fees and interest rates when choosing the best place for your savings. These can vary by account providers, so try NerdWallet’s tool to find the best money market account for you.
John Gower of NerdWallet contributed to this report.
Image via iStock.