How does a money market account work?

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A money market account can allow you to combine the best features of a checking account and a savings account.

Not sure if this combination is right for you? Let’s dive into the details of a money market account to help you decide on your own.

What is a money market account?

A money market account is a type of financial product that allows you to safely store your funds while enjoying competitive rates for your shorter-term goals. Money market accounts also support more ways to move your money than traditional savings accounts.

You can open these accounts at banks and credit unions.

What are the advantages of money market accounts?

Here are some positives to consider why you would put your hard-earned money into a money market account:

  • Your money is safely insured. The money you place in a money market account is insured for up to $250,000 at banks and credit unions that are federally insured.
  • You can earn competitive yields. Money market accounts pay competitive interest rates. Some pay more than savings accounts, too. Take a look at the best money market accounts to see the current rates.
  • You’ll have more ways to access your cash than you would with a savings account. Money market accounts can come with a debit card and/or physical checks.

Although each advantage is worth your consideration, one advantage stands out to Kelan Kline, a creator and co-founder of The Savvy Couple blog. “The biggest advantage of a money market account is the fact that it has higher interest rates than your traditional savings account,” Kline says.

This isn’t always the case, however. So make sure you shop around for both money market accounts and savings accounts when looking for a place to park your money.

What are the disadvantages of money market accounts?

Every financial product has some disadvantages. Here’s what you need to know before opening a money market account:

  • You’ll usually need to put a large amount of money aside. A money market account will typically require a considerably larger deposit than a savings account. “Most money market accounts require at least $1,000 to contribute,” says Jim Pendergast, senior vice president of AltLINE by The Southern Bank. “While you may see some accounts accepting as little as $1, the highest-earning money market accounts could require tens of thousands of dollars.”
  • You’ll have limited access to the cash. Due to a federal rule, you usually cannot make more than six withdrawals per statement cycle.
  • You can find higher yields elsewhere. Although money market accounts can often offer a higher yield than a savings account, they don’t always. You can find higher yields elsewhere.

Who should have a money market account?

So now that you know the ins and outs of a money market account, should you open one? It depends on your goals.

Let’s say you are building your emergency fund, a money market account could be a good place to store that cash. But if you are saving for your distant retirement, then a different financial vehicle would be a better fit.

“A money market can be appropriate for money you don’t need right away, but is also not appropriate for a long-term need you might invest for,” says Charles H Thomas III, CFP, founder at Intrepid Eagle Finance. “Something like an emergency fund or rainy-day fund could be an appropriate use for a money market.”

Can you lose money in a money market account?

You cannot lose money in a money market account if you work with a financial institution that has appropriate insurance. With federally insured banks or credit unions, your funds within a money market account will be protected if the financial institution fails.

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