The Pros and Cons of Money Market Accounts

Vault’s Viewpoint

• A money market account is an interest-bearing account that functions like a hybrid of a checking and savings account
• Some perks of money market accounts include high yields, easy access to funds and protection from federal insurance.
• Money market accounts may have monthly fees that could eat into your overall returns.

What Is a Money Market Account and What Are Its Features?

A money market account (MMA) is a type of deposit account you can find at banks and credit unions. Think of an MMA as a hybrid checking and savings account. You can access and write checks from the account while still earning interest rates that are on par with the best savings accounts on the market. Just note that some money market accounts may limit how many withdrawals you can make per month (typically six) or require you to keep a minimum balance in the account to avoid monthly bank service fees.

Like other deposit accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), up to $250,000 per person, per ownership category, per financial institution. This means if your bank or credit union goes out of business, up to $250,000 of the money in your MMA will be safe.

Money market accounts typically pay variable interest rates, which means your returns can rise and fall depending on market conditions.

Money Market Account Pros

Money market accounts’ competitive annual percentage yields, liquidity and security make them a great place to park and grow your hard-earned cash.

1. Competitive Interest Rates

Perhaps the biggest perk of putting your money in a money market account is that it tends to pay higher interest rates than traditional checking and savings accounts. Today, some of the best money market accounts offer APYs as high as 5.30%. For context, the national average savings account interest rate was only 0.45% APY as of June 17, 2024.

2. Easy Access to Funds

Another reason to look into money market accounts is that you don’t have to jump through hoops to withdraw your funds when you need them. Plus, many money market accounts come with debit cards and check-writing privileges.

3. Protected by Federal Insurance

The FDIC and NCUA insure up to $250,000 in a money market account in the unlikely event that a financial institution fails. As long as you open a money market account at a federally insured bank or credit union, you don’t have to worry about the safety of your funds in a money market account.

Money Market Account Cons

While money market accounts offer many perks, they’re not right for everyone. Consider these limitations of MMAs to determine whether this savings vehicle aligns with your financial goals and needs.

1. Minimum Balance Requirements

Most banks or credit unions require a minimum balance to open a money market account, which can range from a couple of hundred dollars to over a thousand. If you can’t meet the minimum balance requirement, look for money market accounts that don’t have these mandates. Also note that some money market accounts earn according to a balance tier. In other words, you may have to maintain a high account balance to score the best rates.

2. There May Be Withdrawal Limits

The Federal Reserve previously required banks and credit unions to limit withdrawals from savings or money market accounts to six per month but reversed that policy in April 2020. However, some financial institutions still impose those limits. Before opening a money market account at a bank or credit union, check with them to see if they still have the policy in place.

3. Fees

Another drawback of money market accounts is they often come with fees. Many banks and credit unions will impose monthly fees for not maintaining a high enough balance or exceeding the withdrawal limit. Depending on your account balance, having to pay these fees can cancel out much of the earnings you opened up the MMA for in the first place.

Should You Get a Money Market Account?

It’s really up to you to decide whether getting an MMA is the right move for your finances, and thinking about your financial goals is a good way to help you make a choice.

Let’s say you’re still young, have a pretty high-risk tolerance and want to grow your money aggressively, then investing in the stock market may offer better returns than parking your money in an MMA. But if you want to set money aside for taxes and need somewhere to park it, money market accounts are a solid option since they allow you to maximize the amount of interest you can earn in a low-risk setting.

How to Choose a Money Market Account

Before opening a money market account at a bank or credit union, remember to shop around and compare the following factors to find the best choice.

• Accessibility. If check writing and debit card privileges are important to you, check that the MMA offers both. You’ll also want to see if there are any account withdrawal limits and how easy it is to transfer funds from one account to another.
• Fees. Check the financial institution’s fee schedule to see how much the monthly fees, withdrawal fees and out-of-network ATM fees are.
• Minimum balance requirement. Most banks and credit unions require you to maintain a minimum balance in your money market accounts to avoid fees, so you’ll want to know what that amount is.
• Interest rates. Comparing the annual percentage yield offered by different money market accounts is important if you care about how quickly your savings grow. A higher APY means your money will grow faster over time