What Is a Money Market Account and How Does It Work? | Banking Advice
Key Takeaways
- A money market account is a type of deposit account that allows consumers to earn interest while having easy access to their money.
- Money market accounts are insured by the FDIC or NCUA, unlike money market funds, providing a safer option for bank investors.
- Some money market accounts ask for higher minimum deposits or charge maintenance fees to account for higher yields than savings accounts.
Money market accounts provide consumers an option to enhance their savings, due mostly to higher-than-average annual percentage yields and relatively low minimum deposit levels. They can help grow your funds while keeping them accessible.
Before you dial in on a money market account, let’s take a look at what they are, how they work, how they compare to money market funds and what, in general, money market accounts bring to banking.
What Is a Money Market Account?
A money market account is a financial investment deposit vehicle that blends the characteristics of a bank savings account with checking account-like features.
Offered primarily by banks and credit unions, money market accounts usually come with high-interest-rate returns compared with bank savings accounts, sometimes 2 or even 3 percentage points higher than regular bank savings account rates.
Banking consumers may have to steer more cash into money market accounts, as participating financial institutions may ask for higher minimum deposits than savings accounts.
Origin of Money Market Accounts
Money market accounts originated in the 1970s and began flourishing in the 1980s, primarily from the 1980 Depository Institutions Deregulation and Monetary Control Act, which eliminated cap restrictions on bank savings rates.
With no cap on interest rates, banks drew in savers who valued the security of a traditional savings account but were attracted to the higher interest rates generated with money market accounts. No wonder: The benchmark federal funds rate stood at 14% in 1980.
Money Market Account Pros and Cons
Money market accounts may appear to be like traditional checking accounts, but there are some unique variables involved. Here’s a look at the upsides and downsides of money market accounts.
Pros
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High interest rates. Money market accounts have higher interest rates than traditional checking accounts. That means more money in the pockets of bank investors who opt for a money market savings strategy.
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Traditional banking features. Money market accounts feature linked bank debit cards and check-writing privileges, which give users more spending freedom when using the accounts.
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Uncle Sam has depositors’ backs. Like regular bank savings accounts, money market accounts are government-protected up to $250,000 per account depositor, via the FDIC or the National Credit Union Association. It’s fairly rare to see an investment vehicle that can produce rates of return of 4% or more and also earn federal government asset protection.
Cons
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Minimum deposit. Money market accounts may be limited somewhat by minimum deposit requirements. The amount of the minimum deposit varies from bank to bank and from credit union to credit union. A money market consumer may see a minimum deposit of $25 at one bank and $5,000 or even $10,000 at another bank. The higher the deposit, the greater the yield, in many cases.
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Withdrawal limits. Money market accounts also often come with withdrawal guardrails. Historically, those limits were no more than six withdrawals per month, via the federal Regulation D limits. However, those cap restrictions were lifted as a federal rule, allowing individual banks to place their own individual withdrawal limits. Account users may be forced to pay a penalty fee for excessive withdrawals.
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Higher management and service fees. Besides generating fees from check writing, banks and credit unions also charge high operational fees for MMAs relative to savings and checking accounts. It’s not uncommon to find monthly money market account fees as high as $10, $15 or even $25 per month – significantly more than regular savings and checking accounts.
Money Market Account vs. Money Market Fund
Money market accounts are not money market funds, and bank depositors need to be aware of that. Here’s how they differ.
Money Market Deposit Accounts
Money market accounts are basically a savings and checking account hybrid that generally pays a higher interest rate than a traditional bank account.
The rate of return is set by the individual bank and is a fixed rate. Cash withdrawals are generally limited by most banks and credit unions, and there are service fees and withdrawal fees tied to money market accounts.
Money market accounts of up to $250,000 per depositor are guaranteed by the U.S. government, via the FDIC or NCUA.
Money Market Funds
As the name suggests, a money market fund is a form of mutual fund, complete with a net asset value of $1 per share and a modest, but not guaranteed, investment return.
By and large, money market funds comprise short-term investment securities with a duration of one year or less. Common securities included in a money market fund include short-term obligations generated by corporations or the U.S. government, U.S. Treasury bonds and notes, and high-grade commercial debt instruments issued by corporations.
While money market funds are usually a stable, conservative capital-appreciation vehicle, don’t expect returns to outpace inflation or outperform more aggressive funds that include stocks and commodities.
Unlike money market accounts, money market funds are not insured by the FDIC or NCUA.
How to Open a Money Market Account
Financial consumers can open a money market account directly at a bank or credit union, or via online banking and credit union platforms. The experience is similar to opening a bank savings or checking account.
If you don’t need immediate access to cash for a set period, then a certificate of deposit could be preferable, depending on your situation. But if you want to keep savings on hand in case of emergency and you can meet the minimum deposit requirements, money market accounts are an attractive option.
