What Is a Money Market Account? Should I Get One?
A money market account (MMA), also known as a money market deposit account (MMDA) or money market savings account, is a special type of account offered by some banks and credit unions. They are not 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 an MMA include:
- Money market accounts are federally insured (by the FDIC for banks or the NCUA for credit unions)
- A depositor (you) is limited to 6 or fewer transfers and withdrawals per month, according to the Federal Reserve’s Regulation D (does not include withdrawals by ATM, in person, by mail, messenger, or telephone check)
- Like a savings account, MMAs pay interest, but typically require a high minimum balance to avoid fees
- Some money market accounts allow you to write checks on the balance (limited to 6 per month)
Money market accounts vs. alternatives
Most savers will be primarily concerned with the yield an account may offer. NerdWallet found that money market account rates perform better on average than savings accounts as well as very short-term CDs.
- Money market accounts: 0.19% APY
- 3 month CD: 0.17% APY
- Savings account: 0.15% APY
- Interest checking: 0.10%
The higher yield doesn’t come without certain requirements, however. The average minimum balance required for a money market account is much higher than any of the alternatives.
- Money market accounts: $8,700
- CDs: $2,461
- Interest checking: $839
- Savings account: $318
Who should choose a money market account?
An MMA may be an appropriate choice for consumers who:
- Have significant savings (let’s say $5,000+) and can maintain that balance month-to-month
- Need the ability to access their money occasionally (CDs are therefore not a good option)
- Are looking for a risk-free account in which to store their excess cash
Let’s consider a hypothetical money market account that pays 0.50% APY, has a minimum balance of $5,000 (with a fee of $10 for dropping below) and an additional $10 fee for excessive withdrawals (over 6 per month).
1 year interest earnings at minimum balance: $25
Just 3 fees of either type would completely wipe out interest income, so make sure to pay close attention to the details before opening an account, and keep on eye on your balance and transactions afterward.
Try NerdWallet’s tool to find the best money market rates to help choose the highest-yielding account from thousands of banks and credit unions.
Other opinions and advice
- Daniel Larsen, of Larsen Financial Management offers his advice and suggests alternatives:
First, it is important to make the distinction between an FDIC insured bank money market account, and a money market mutual fund which is not insured and has a higher risk/reward. Many savers during 2008-2009 weren’t aware of the difference and were caught off guard when they lost money in these accounts.
Secondly, you have to think about what your purpose for saving is, and how much you want to withdraw from savings. If you want no risk and don’t want to take withdrawals, CD’s are probably the way to go. You can use varying maturities if you want to have money available to invest later at higher rates. Another option that can provide a higher rate of return is an online savings account. Companies like ING and Capital One offer savings accounts with .5%-1% interest and often feature a “bonus rate” for the first year.
- Frank Almeida, VP of Retail & Marketing at First Citizens’ Federal Credit Union of Massachusetts explains that the slightly higher rate of a money market account may make other options preferable in today’s environment:
…Money Market accounts pay a higher rate and typically require higher deposit balances to earn the increased rate. In the past these account presented consumers a great alternative to traditional term certificates (CD’s) and savings accounts. They provide a better rate while keeping the funds available without penalty for withdrawal. In today’s current rate environment looking for a “higher” rate account may not be the best option given what these accounts are paying. Today’s consumer looking for the greatest earnings should be looking for a financial institution that rewards them for their entire banking relationship. A rewards program that doesn’t simply eliminate the scheduled fees associated with an account but rather a true rewards program.
Rewards programs are increasing in availability. Consumers who take the time to research their options will find themselves in a much more advantageous position than the depositor who simply chases rate.
Money market image via shutterstock