What to consider before opening a money market account
The best way to choose a money market account is to compare APYs and minimum balance requirements. You’ll want to look at how much money you must always have in the account to avoid a maintenance fee and the minimum to earn the stated APY.
Also, look at features, such as ATM access via an ATM card, and check-writing privileges. If these features aren’t offered, that’s OK, but make sure you understand how you’ll access this money. If it’s money that’s going to be used daily, then a checking account might be more appropriate than a money market account.
If you want to physically walk into a bank and talk to a banker about your money market account, choose a bank that has brick-and-mortar locations. If this doesn’t matter to you — and earning a higher APY is more important — then an online bank will probably be the best way for you to earn more interest. An online bank may offer convenient customer service options through its phone availability, and it may have secure messaging on its website or mobile app. It may also allow live chats with a customer service representative on its website.
Important money market account terminology
- Money market account: A type of savings account that may offer an ATM card for ATM withdrawals and/or checks.
- Check-writing privileges: A money market account may allow you to write checks against the account. This is one of the main differences between money market accounts and savings accounts. Savings accounts usually don’t allow this.
- Interest: Money that you earn for having your funds deposited with a bank.
- Compound interest: Earning interest on the previous interest you’ve earned.
- Interest rate: The percentage of your balance that is paid to you over the course of one year for having your funds on deposit. A number that doesn't take into account the effects of compounding.
- Annual Percentage Yield (APY): Takes into account the effects of compounding during the year. The best way to compare yields is to use this number, rather than comparing interest rates. The higher the APY, the more income you’ll earn on your cash.
- Minimum balance requirement: The amount you have to keep in a savings account in order to avoid a monthly maintenance fee.
What is a money market account and how does it work?
A money market account is a type of savings deposit account that can be found at banks and credit unions. Money market accounts work like a savings account, where you can deposit and withdraw money into it. You will also earn interest on the money you deposit into a money market account. Money market accounts generally let you withdraw money, but banks may limit withdrawals and transfers. Unlike most savings accounts, money market accounts may have check-writing privileges. You also might have a debit card and be able to access money at an ATM. High-rate money market accounts may pay a higher interest rate than traditional savings accounts, but their minimum deposit and balance requirements may be higher.
Money market accounts are offered by FDIC banks and National Credit Union Administration (NCUA) credit unions. Money market accounts typically have a few advantages, including a high yield, check-writing privileges, and ATM access. They may have some disadvantages, though. For example, some institutions might limit the number of withdrawals or transfers per statement cycle, and you may be able to find a high-yield savings account that has a higher yield. Money market accounts might have a higher minimum balance requirement than a high-yield savings account. But you should be able to find a money market account with no minimum balance requirement or a low one. This is especially true at online banks.
Money market accounts may come with checks and a debit card, which distinguishes them from high-yield savings accounts. The check-writing capability of money market accounts provides a degree of flexibility and liquidity often not found in other savings accounts. Like a traditional savings account, there's no set term for maturity with a money market account — you can park cash for an unlimited amount of time. Keep in mind that you may be required to make a transaction every so often in order to prevent your account from going dormant. Check with your bank for its policies.
That said, safety is still a top feature of these financial tools. Money market accounts are insured up to $250,000 at banks that are insured by FDIC. The National Credit Union Share Insurance Fund (NCUSIF) provides all members of federally insured credit unions with $250,000 of coverage for single ownership accounts at an NCUA credit union.
The Federal Reserve directly impacts money market account yields. An increase of the federal funds rate would likely cause money market account yields to increase -- especially at online banks.
Money market accounts and compounding interest
Interest rates determine how much interest and income your money market account earns. The more money you have in your money market account and the higher the interest rate you’re earning, the more money you’ll earn on your deposits in this account.
When the Federal Reserve raises or lowers the federal funds rate, it tends to affect the yields on money market accounts. When the Fed raises rates, savers with high-yielding accounts tend to receive higher APYs. From 2015 to 2018, for example, the Fed raised rates nine times, helping many savers at high-yielding online banks earn substantially higher APYs.
But starting in 2019, the Fed started lowering rates, citing a potential slowdown in the global economy and inflation concerns. In March 2020, the U.S. central bank made two emergency rate cuts in response to the coronavirus outbreak, sending the federal funds rate down to zero and unwinding all nine past rate increases.
In late 2021, however, the Fed signaled an intention to raise the Fed funds rate several times in 2022 in response to surging inflation. The first of those increases was announced March 16, when Fed officials noted they intended to raise rates six more times in 2022. In response, some banks increased the yields offered on money market and other types of accounts, though other factors, such as competition, play a role.
Interest is usually credited on a monthly basis on money market accounts. The APY on an account includes the effects of compounding during the year. So, when you compare APYs, you can tell which account is going to help your money grow the most. The best way to compare interest you’ll earn on different money market accounts is using an apples-to-apples approach. Always compare APYs and not rates. You can use our compound interest calculator to determine your potential earnings on a money market account.
Money market accounts typically credit interest monthly. You’ll usually receive your interest payment on or around the same date each month.
What is the average interest rate on a money market?
The average interest rate on a money market account is currently 0.07 percent, according to Bankrate's weekly survey of institutions. Yet some banks are offering about seven times that. That makes it crucial to shop for the best deal when you're searching for a money market account.
It's important to remember that institutions can change their interest rates at any time, pushing returns higher or lower depending on the market.
Are money market rates fixed?
Most money market rates are variable, not fixed. That means the rate and APY you receive can rise or fall as market conditions change. A fixed introductory APY is the exception. During the promotional period, the fixed yield gives you a certain APY for a specific period of time. You might lose the fixed yield, however, if you don’t follow certain rules. An introductory rate may also require a deposit made with new money, which usually must come from outside the bank.
An introductory rate may be a good deal if rates decrease or don’t increase during the promotional period.
Since money market rates are expected to stay relatively steady in 2021, a high introductory rate might be something to consider. Check to see how competitive the ongoing APYs are in order to get a sense of whether your yield after the introductory APY expires will still be competitive. But remember, it’s not a guarantee since APYs are usually variable.
Is a money market account safe?
Money market accounts at an FDIC-insured bank or a federally insured credit union are safe as long as they’re within limits and guidelines. FDIC deposit insurance covers accounts at FDIC banks up to at least $250,000. An account at an NCUA credit union is insured up to the same amount as a FDIC bank. At both an FDIC bank and a NCUA credit union, your money that’s within limits and guidelines is protected and backed by the full faith and credit of the U.S. government should the bank or credit union fail.
To check whether or not a bank you're considering is FDIC-insured, you can use the FDIC’s BankFind tool. The tool may also help you realize if multiple banks use the same FDIC certificate. Always double-check with the FDIC or NCUA and your financial institutions to confirm insurance coverage.
Who should get a money market account?
Anyone looking for a safe place to stash a good chunk of money and earn some interest may benefit from a money market account. But these accounts make particularly good sense in a handful of situations. For example:
- Setting up an emergency savings fund.
- Saving for a goal, such as saving for a home purchase or a vacation.
- Growing your savings in a high-yield account that may offer the opportunity to write an occasional check.
- Earning a higher yield than you’re earning in your current savings or checking account.
As a saver, it's important to know the differences between a money market account, savings account, and a CD.
Here's when to consider a money market account:
- You want an account that offers liquidity, safety and a higher interest rate than traditional savings or checking accounts.
- You want the ability to write checks or you may be able to use a debit card up to six times per month.
- You want immediate access to funds if you're ever in a bind.
- You want a good spot to keep your emergency fund.
- You don't want to lock up your money in a CD for an extended period, but you still want a comparable interest rate and the safety of an FDIC- or NCUA-backed account.
Money market account fees and minimums
Minimums and fees to open and maintain a money market account vary by institution.
There are typically a few types of minimums you should watch for: minimum deposit requirements to open an account, minimum amounts to earn the APY and minimums to avoid fees.
Watch for monthly fees, transfer fees, shipping fees, inactive account fees or any other penalty you might incur for not using the account to the bank's specifications.
Can you withdraw money from a money market account without penalty?
You’re usually able to withdraw money from a money market account without penalty. Exceptions may be if a bank charges a fee after a certain number of withdrawals are made or if the withdrawal is made to close an account — and the account charges an early close-out fee.
Can you add money to a money market account?
Yes, you can add money to a money market account. Money market accounts are liquid accounts, so you can add to the account at any time.
Banks may allow you to deposit checks using a mobile app. While additions aren’t limited, withdrawals may be limited on a money market account.
Can you pay bills and write checks with your money market account?
Some money market accounts, but not all, provide the ability to write checks and pay bills directly from the account. These accounts may even come with a debit card. But there's a limit to the number of certain transactions you can make. Money market accounts only allow for up to six types of withdrawals or transfers per statement cycle.
If check writing is a feature you want in a money market account, confirm with the institution before opening an account that its product offers that capability.
Money market account advantages and disadvantages
Some money market accounts have certain features that you won’t find in a savings account. Here’s a look at some of the key advantages and disadvantages of money market accounts.