As you consider deposit options for your money, money market accounts (MMAs) will likely come up in your search. Think of a money market account as a parking spot for cash that you could need at a moment’s notice, but it comes with a few guardrails to prevent you from accessing that money for easy spending.
Just as you compare the pros and cons of any place where you’ll put your money, it’s important to understand the benefits and drawbacks of money market accounts. (And to clarify, we’re talking about money market accounts, not money market funds.)
Advantages of money market accounts
Money is protected by federal insurance
At federally insured institutions, you never have to worry about the safety of the funds in a money market account. As long as the bank or credit union has insurance from the FDIC or NCUA, up to $250,000 are protected even if the institution fails and shuts its doors.
MMAs earn interest
When you make a deposit in a money market account, it does more than sit there. It grows. The average money market account rate is currently 0.09 percent, according to Bankrate data. Make sure to shop around, though. The best money market rates are significantly higher than the average, with many over 1 percent and up to 1.85 percent.
You have easy access to cash
You don’t have to jump through major hoops to withdraw the money from a money market account when you need it. You don’t have to completely redo your banking portfolio, either. Instead, you can link your checking account at your existing financial institution to a money market account at a new bank for online transfers.
Additionally, many money market accounts come with debit cards for ATM access and check-writing privileges. There is typically a limit of six withdrawals per statement period, though.
Disadvantages of money market accounts
Better rates may be available elsewhere
While the best money market accounts do offer some decent earning potential, it’s important to note that you might be able to find higher interest rates with other savings products that come with additional restrictions.
For example, you won’t earn as much with a money market account as you would with a traditional CD because the CD has a time commitment: The bank will pay you more in exchange for locking up your funds longer. Committing to a two-year CD, for instance, could reward you with up to a 3 percent rate. Keep the trade-off of a lower yield in mind when you’re thinking about opening an account.
Minimum balance requirements may stand in the way
Most money market accounts have fairly low minimum balance requirements – as little as $0, in some cases. However, capitalizing on the interest rate that initially grabbed your attention might only be possible with a significant deposit. Some banks and credit unions have a $100,000 minimum in order to score their best rates.
Is a money market account worth it?
The safety, liquidity and yield of money market accounts makes them great candidates for a few key pieces of your personal finance portfolio.
- Your emergency fund: The importance of having money set away for those unplanned, unwanted expenses — a medical emergency, a major car repair or a job loss, for example — cannot be overstated. A money market account makes those funds easily accessible if you need them while keeping them separate from your checking account and the temptation to dip into them.
- Your next big expense: Whether you’re saving for a wedding or a vacation, a money market account gives you a good place to park those funds. Plus, you can take advantage of the interest rate to help give your savings a bump and get you closer to the finish line a bit faster.
- Your tax payments: For independent contractors and freelance workers, setting money aside for taxes can be tricky. A money market account can help you make sure you’re saving the appropriate amount of money and send quarterly tax estimates.
While high-yield savings accounts and CDs are also options for storing money away for different goals, a money market account might be a better option when more frequent access to that money is desired. If you’re saving for a particular goal, such as buying a car, a money market account will allow you to write a check from the account when it comes time to use those funds.
Don’t confuse money market accounts with money market funds
While money market accounts and money market funds may be similar in name, they are completely different products.
Money market funds are relatively safe. However, they do not have insurance, so they’re not worry-free. Money market funds are better suited for your brokerage account, giving you the ability to hop on investment opportunities at a moment’s notice. They can be easily mixed up with money market accounts, which serves as a valuable lesson: Always do thoughtful research any time you’re thinking about depositing, investing or spending your hard-earned money.
— Greg McBride, CFA, is Bankrate’s chief financial analyst. As a personal finance expert, he is regularly quoted in the media for his in-depth commentary and practical advice to consumers. Bankrate’s René Bennett contributed to an update of this story.