A money market account is an interest-bearing account that typically pays interest rates higher than a savings account. Your funds are kept liquid, and you earn a lower interest rate than other investments because money market accounts are considered safe investments. Money market accounts give you the ability to write up to six checks per month.
Some money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), so they have the same $250,000 guarantee that savings accounts and certificate of deposits (CDs) have. You can expect to earn an annual percentage yield (APY) of at least 1% on average with the best money market accounts.
How Money Market Accounts Work
Once you open an account, you can deposit funds and earn interest with an APY typically above 1%. Most accounts allow you to write checks, but you’re limited to six transactions per month. If you go over this amount, you might be charged fees between $5 and $15 per transaction or you can lose the privilege of having your money market account.
Money Market Account Costs
- Monthly account fees: $5 to $15; waived if you maintain a minimum account balance set by your provider
- Transaction fees: Six free transactions per month; each transaction thereafter costs $5 to $15, or you can lose the privilege of having a money market
- Cashier’s check fees: $0 to $15 per cashier’s check
Pros & Cons of a Money Market Account
Money markets can be an excellent way to securely put your money away while earning high interest every month. Additionally, you get the ability to write checks, and your money is guaranteed by the FDIC. However, the high returns and security come at the expense of balance requirements and account limitations.
Pros of a Money Market Account
- Earn interest rates of at least 1 percent: If you open an account, you can quickly start earning at least 1% in interest. Their rates are competitive with regular savings accounts. However, they tend to be more liquid and serve as a relatively safe investment.
- Write up to six checks per month: Compared to other accounts such as savings accounts and CDs, some money markets allow you to write checks. Providers generally limit your account to six checks per month.
- Relatively safe investment: Most accounts are FDIC-insured up to the federal limit of $250,000. This means if the bank goes out of business, your funds are guaranteed up to that amount.
Cons of a Money Market Account
- High minimum balance requirements: Some of the best money market accounts require you maintain a high minimum balance. If you don’t meet this requirement, it’s likely you will have to pay a monthly fee between $5 and $15, depending on your provider.
- Account withdrawal penalties: Money markets limit your account to six withdrawals per month. If you go over this limit, your account can be canceled or converted to a checking account. It’s important to plan ahead if you know you will need some of your funds from your account to avoid any complications.
- Inflated introductory interest rates: Some accounts offer attractive introductory rates for the first 12 months that may motivate you to sign up. However, be wary of these as the rates typically drop drastically once the promotional period ends.
Money Market Accounts vs Other Accounts
It’s important to not confuse money market accounts with other accounts like savings accounts, certificate of deposits, and money market funds. Some of the most common differences include account restrictions, interest rates, ability to write checks, and accessibility to your money.
Money Market Accounts vs Savings Accounts
Both savings and money market accounts are designed to help you save money. While savings accounts typically offer lower interest rates, money markets often require a high minimum deposit. However, you might be able to find a money market provider that offers a low minimum deposit and higher interest rate than most savings accounts.
Another distinction between savings and money market accounts is your ability to write checks. Regular savings accounts do not let you write checks against your account. Meanwhile, money market providers typically allow you to write up to six checks per month.
Money Market Accounts vs Certificate of Deposits
CDs generally pay higher interest than money market accounts. However, you need to keep your money in a CD account for a longer period. CDs only allow you to withdraw your funds after your term is up, which could range from three months to 10 years. With a money market, your money is more liquid and readily available.
The best CD rates usually have a longer term length. If you know you won’t need to withdraw your money in the near future and you want to maximize your interest earnings, a CD is an excellent option for you. What’s more, CDs typically require a lower minimum balance compared to a money market account.
Money Market Accounts vs Money Market Funds
Although the names are similar, money market accounts and money market funds (MMFs) are very different. Money market accounts are available at most banks and are insured by the FDIC up to federal limits. Meanwhile, MMFs are mutual funds that invest in low-risk securities, including Treasury bills and commercial paper.
Most of the time, you’ll need to go through a broker rather than a bank to open an MMF. Because MMFs aren’t backed by the FDIC, the more secure place to hold your money is in a money market account. An MMF is a good option if you want to get into some investments while keeping your risk low.
Sometimes, the best account for you is one that pays the best rate as money market accounts are defined as interest-bearing accounts that give you a safe method to save your money. Typically, they are inexpensive account options as long as you stay within the account limitations and maintain the required minimum balance.