What is a money market account?

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What is a Money Market Account?

Money market accounts are accounts that can pay competitive rates and are a safe place to park your money for your shorter-term goals. You may want to open a money market account if you want a predictable yield and a federally insured account.

Money market accounts support more ways to move money out of the account than savings accounts. However, you aren’t supposed to use a money market account like a checking account. There are limits to how many times you can move money out of a money market account, just as there are limits to moving money out of a savings account. Money market accounts may require heftier minimum deposits and balances compared to savings accounts.

There are always exceptions and no product is flawless. Make sure to understand the trade-offs.

Pros and cons of money market accounts

Advantages

  • Competitive yields: Right now, the best money market accounts pay around 1.75 percent APY or higher.
  • Insured deposits: Your money is insured up to $250,000 with accounts at a bank or credit union.
  • Your cash is accessible: Your account often comes with a debit card and/or physical checks.

Disadvantages

  • High account minimums: Money market accounts may require a larger deposit than traditional savings accounts.
  • Lower yields than other bank products: Certificates of deposit often pay a more competitive yield.
  • Restrictions on withdrawals: While you might write checks or use a debit card to move money out of your money market account, there are limits because of a federal mandate.

How do I choose the best money market account?

First and foremost, you should shop around.

As you do your research, one of the most important factors to consider is the money market account’s annual percentage yield. The annual percentage yield, or APY, indicates how much you will earn with compound interest over the year. In other words, it’s the interest earned on your first deposit as well as the interest earned on top of other interest earnings. The higher the number, the more your money will grow.

Next, review any account restrictions. Check to see whether the money market account requirements make it too difficult to earn the yield or to sidestep a fee. It’s not uncommon to see large balance requirements. For example, BMO Harris Bank currently requires a $5,000 minimum opening deposit to earn 1.95 percent APY on its money market account.

Also, make sure to look for fees, including whether the account charges a penalty if you close it within three months of opening. Look out for monthly fees, transfer fees, shipping fees, inactive account fees and other penalties.

What is the difference between a money market account vs. other accounts

MMA vs checking

While money market accounts may offer check-writing privileges, these accounts aren’t designed to be used like checking accounts. Under a federal mandate, you will have a limit on how many times you can withdraw money from these accounts. The best money market account rates are much higher than checking accounts, however.

MMA vs savings

Savings accounts and money market accounts have more in common than not: They pay interest, and they are designed to keep you saving. But there are a few distinctions. Generally, you will have to park more money in a money market account than you will in a savings account. With a money market account, you can get checks. Don’t expect this tool in your savings account.

MMA vs CDs

A CD could pay you a more competitive rate than a money market account, but your money is more liquid in a money market account than in a CD. If you are deciding between a money market account and a CD, evaluate your goals before moving ahead.

What is the difference between a money market account and a money market fund?

While money market accounts and money market funds have similar names, they are very different. Most notably, money market funds offer no FDIC insurance, and you could lose your principal. Here is a breakdown on their primary differences.

Money market account Money market fund
Purpose of account For your emergency fund or shorter-term savings goals Often for individual investors who are seeking a parking spot for their cash
How to invest Deposit money at a financial institution online or in person Buy shares at a brokerage, bank or a mutual fund company
Accessing funds Can withdraw money up to six times per month You have ready access to cash. You can even get it same day
Insurance coverage Up to $250,000 per bank or credit union customer No FDIC or NCUSIF insurance (even when you buy them through a bank)

Bottom line

If you want to park your shorter-term savings somewhere that offers relatively easy access to it, a money market account is a smart option to consider.

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