A money market account (MMA) is a savings account that allows a limited number of checks to be drawn from the account each month. The rates on money market accounts are typically higher than traditional savings accounts but may require larger minimum deposits and balances. How much interest an MMA pays, and whether it’s the highest-paying deposit product offered, varies from bank to bank.
But when shopping around for a bank account, you’re likely to see money market accounts offered alongside conventional savings.
How much interest a money market account pays, and whether it’s the highest-paying deposit product offered, varies for each account from bank to bank.
Where money market accounts came from
A few decades ago, there was a legal cap set by the government on the interest rates a bank could offer customers. Banks couldn’t try to outdo one another by offering higher rates, so instead they sold themselves with good customer service and free swag like toasters and slow cookers for new account holders.
Capped rates became unworkable in the early 1980s. Market interest rates were rising, but savings rate caps stayed relatively low in order to help banks, which had made many loans at lower interest rates in previous years, stay afloat by limiting how much they had to pay out in interest to customers.
In response, consumers seeking higher rates took their money out of the banks and put it into money market mutual funds that paid market rates of interest. These funds invested in short-term debt securities but were not federally insured like bank accounts.
Still, consumers’ savings flowed out of banks, leaving them with little money to lend out and eventually forcing Congress to pass the Garn-St. Germain Depository Institutions Act of 1982.
That law let banks offer money market deposit accounts that paid a “money market” rate of interest to attract deposits, rather than a capped savings rate.
What money market accounts do
At their core, MMAs are basically just a type of savings account, with some minor variations. How much interest an MMA pays, and whether it’s the highest-paying deposit product offered, varies from bank to bank.
The best way to think of MMAs is as a hybrid of checking accounts and savings accounts, says Dan Geller, executive vice president of Market Rates Insight, a source of pricing data for financial institutions.
“It comes under the umbrella of savings, but it has limited checking capabilities, which makes it more attractive than just pure savings accounts,” Geller says.
Don’t get too excited about that checkbook (or, in some cases, debit card), though; banks typically limit your check writing to about 3 checks a month, Geller says.
Beyond that, the total number of transactions you can make is limited by the Federal Reserve, says Denyette DePierro, vice president and senior counsel for the American Bankers Association.
“A money market account is a savings account that allows you to make up to 6 transactions a month out of it,” DePierro says. “It’s different from a checking account because a checking account is unlimited.”
Those who exceed the transaction limit will begin receiving warning notices from their bank. And if you keep it up?
“At some point in time, if you continuously move money more than 6 times out of that account, the bank is required — it’s not their choice; they’re required by the Federal Reserve — to move you … into a checking account,” DePierro says.
And don’t worry about losing your balance if the bank fails. Like savings and checking accounts, money market accounts are federally insured.
Comparing account features
|Savings||Checking||Money market account|
|You get a checkbook for withdrawal||X||X|
|You get a debit card for withdrawal||X||X||X|
Money market accounts still in demand
As times have changed, you’d think MMAs would have become less relevant:
- The transactional capabilities of MMAs look pretty pathetic compared with a typical rewards checking account, which can pay substantially more in interest each month with no limitations on the number of transactions you can make.
- Some banks are beginning to pay more interest on savings account deposits than MMAs, making money market accounts seem ever more redundant.
But in recent years, MMAs have held record amounts of Americans’ cash, in the trillions of dollars, Geller says.
“It has to do with uncertainty about the economy among consumers,” he says. “That’s where they like to park their money until they figure out which way they want to go.”