How does a money market account work?

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A money market account is a type of financial product that allows you to safely store your funds while earning some interest. Money market accounts combine some of the best features of a checking account and a savings account. You can open these accounts at banks and credit unions.

How do money market accounts work?

When you open a money market account, you deposit a sum of money and begin earning interest. You may have to deposit a certain amount to open the account, but you’re free to add or withdraw from the account, so long as you maintain the minimum balance requirement.

Money market accounts pay a variable interest rate, allowing you to earn a return on your money. It’s common for these accounts to have tiered rates, meaning higher balances are rewarded with a higher annual percentage yield (APY). Money market accounts tend to offer higher yields than typical savings accounts.

Money market accounts are similar to savings accounts, but they have some transactional features like a checking account. For example, a money market account may come with a debit card and checks. However, money market accounts are still limited to six monthly withdrawals, just as savings accounts.

What are the advantages of money market accounts?

  • Your money is safely insured: The money you place in a money market account is insured up to $250,000 per account owner and $500,000 for joint accounts at banks and credit unions that are federally insured.
  • You can earn competitive yields: Money market accounts pay competitive interest rates. Take a look at the best money market accounts to see the current rates.
  • You’ll have more ways to access your cash: Money market accounts can come with a debit card and/or checks.

What are the disadvantages of money market accounts?

  • They may have large minimum deposit requirements: A money market account will typically require a considerably larger deposit than a savings account. It’s not uncommon to see accounts require $1,000 or even up to $25,000 to open.
  • You’ll have limited access to the cash: Due to a federal rule, you usually can’t make more than six withdrawals per statement cycle. This applies to savings accounts, too.
  • You can find higher yields elsewhere: Although money market accounts can often offer a higher yield than a savings account, they don’t always. Be sure to shop around and compare your options.

Who should have a money market account?

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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Written by
Sarah Sharkey
Contributing writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.
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