Financial planners recommend that you keep a rainy day fund equal to at least three months of your living expenses—but where should you stash the cash?
Since this is savings you might need in an emergency, you don’t want to invest it in stocks, which are too volatile in the short term. And you don’t want to park it in your checking account because you might spend it.
Another possibility could be a money market account (MMA). Learn the advantages and disadvantages of money market accounts before you choose this option.
Money market accounts: An overview
When you open a money market account, the bank invests your cash in safe places, like treasury bonds or certificates of deposit (CDs). As with most types of savings accounts, your interest rate can change based on underlying economic factors—but you can never lose your money because the accounts are insured (up to $250,000) by the Federal Deposit Insurance Corporation (FDIC). Although they are not checking accounts, some money market accounts provide you with a debit card and checks.
What are the advantages of a money market account?
The accounts feature three important advantages that make them good options for emergency savings:
- With FDIC insurance you can sleep easy knowing your emergency fund will be there when you need it. Note that the FDIC does not insure money market mutual funds, which are sold through brokers and are not the same as money market bank accounts.
- It’s easy to withdraw money immediately, any time, for any reason, by transferring into your checking or regular savings account.
- Higher interest. Money market accounts generally pay more interest than a regular savings account, although that’s a moving target: In early 2018, the two were paying about the same.
What are the disadvantages of a money market account?
Consider these factors when weighing your options:
- Balance requirements. Most money market accounts require a hefty initial deposit (as much as $5,000) and an ongoing minimum balance. Savers who fall below that balance will incur fees (perhaps $10 a month)—which eat into your interest gains.
- Lower interest than CDs. As of early 2018, money market accounts were paying an anemic 1-1.5 percent annual percentage yield, compared with 2-2.5 percent for CDs. But CDs can’t be cashed out at any time.
- Limited ways to withdraw. Many money market accounts come with a debit card and checks, but the Federal Reserve limits account withdrawals to six per month. (Your bank may limit them even more.) Go over the limit and you’ll pay fees equivalent to bouncing a check.
What’s the bottom line?
The security of a money market account might trump the low interest rates they’re paying today. But given the balance requirements and the limited ability to write checks, you might be better off with a conventional bank savings account, which is also FDIC insured and could earn as much interest.
Shop around for money market rates here and savings account rates here. Note that it’s often more convenient to keep your money market account at the same bank as your checking account, which makes it easier to transfer funds between them.