August 2, 2018

What is a Money Market Account?

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Money market accounts have advantages over savings accounts. But how do they work? And can you lose money in one? Here are the pros and cons you should know.

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A money market account (MMA) is a cross between a high-yield savings account and a checking account. They may offer higher interest than your standard savings account, but they often come with a checkbook and/or debit card.

Read on to learn if the money market account may be right for you.

How Does a Money Market Account Work?

As with a traditional savings account, you deposit money when opening a money market. You can access those funds by:

  • Writing a check
  • Using your connected debit card
  • Making an in-person withdrawal
  • Transferring funds online

You can make as many deposits as you like into your MMA. But the bank will limit the number of monthly withdrawals to six.

The amount of interest you make will vary by bank. Whichever bank you choose, always make sure it's FDIC insured.

Are Money Market Accounts Safe?
Just like savings or checking accounts, the FDIC insures MMAs up to $250,000 per depositor. This means that if the bank holding your money market account closed, you could still recapture your funds.

What Is a Money Market Account Good For?

Money market accounts offer higher interest than savings accounts but lower rates than CDs. But a CD ties up your funds until the maturity date, which could be 6 months to 10 years.

MMAs are ideal for funds you may need in the near future. Some common uses are:

  • Emergency funds
  • Vacation funds
  • Savings toward a home down payment on a home

Basically, an MMA is a good choice if you need occasional access to your money but want to earn interest on those funds.

However, your access IS limited. If you make frequent withdrawals, you'll need a checking account that doesn't limit your withdrawals.

Check out a list of the best bank promotions that do NOT have a direct deposit requirement.

Pros of a Money Market Account

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Higher interest rates
Rates vary by bank. But some banks offer more interest in MMAs than regular savings accounts, especially for higher balances.

Access to checks
Some banks offer a checkbook with your money market account. This gives you another easy way to access your funds.

Your investment is liquid
If you need money for an emergency, you can close your money market account at any time without fees or penalties.

No worrying about maturity dates
Unlike CDs, MMAs don't mature over time. Your money sits in the account accruing interest. With CDs, you have to watch the maturity dates and decide whether to reinvest the money or withdraw your principal (and interest).

Available at brick-and-mortar banks
Money markets allow you to earn higher interest rates without using an online-only bank. Check with several banks to see which offers the highest rates.

No special approval needed. To invest money, you need to apply for a brokerage account. Brokers have different requirements that you not meet. Bur MMAs can be opened in person or online with your cash deposit, just like savings accounts.

Can You Lose Money in a Money Market Account?
You CANNOT lose money as long as the bank is FDIC insured.

A money market account is not the same as a money market fund. An MMA is a deposit account, just like a regular checking or savings account. A money market fund is an investment and does pose a risk of loss.

Cons of a Money Market Account

Limited monthly withdrawals
The Federal Reserve restricts you to six withdrawals per month. This includes any type of withdrawals including:

  • Debit card transactions
  • Internal or external transfer
  • Checks.

If you need to make more frequent withdrawals, you may be better off with a high-yield checking account.

High initial deposit and/or monthly balance
Due to the higher interest rates, banks often require a minimum initial deposit between $1,000 and $10,000. You may also have to meet a monthly minimum balance to avoid maintenance fees.

Less interest than a CD
You'll sacrifice some money to have access to your funds. Tying up your money up in a CD for a set time means you'll earn more interest. This is especially true if you practice CD laddering, or continually reinvesting your funds for a larger return.

Bottom Line

If you want the best of all worlds - decent interest rates, access to your funds, and FDIC insurance - the money market account may be a good option.

As with any bank product, shop around for the best interest rates. Try your local banks as well as online ones such as CIT Bank money market, which may offer higher rates due to lower overhead.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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