Takeaways
- Money market accounts have higher interest rates than traditional checking accounts.
- Many online and traditional banks offer money market accounts.
- Interest on Money Market Accounts fluctuates based on interest rates.
- Money Market Accounts can help you increase your interest income.
- Many banks and credit unions offer money market accounts insured by the FDIC or NCUA.
Interest rates have risen sharply over the past several years, with rates at around 0% in 2022 rising swiftly to over 5% in 2023. This boom in interest rates established by the Federal Reserve to combat inflation has encouraged investors to refocus and prioritize savings. Money market accounts have gained popularity as investors look for a haven for their investment capital.
When the Federal Reserve raises interest rates, it has a trickle-down effect on financial products that charge interest rates, such as bonds, certificates of deposits, savings accounts, checking accounts, and money market accounts.
What is a Money Market Account?
A money market account is an interest-bearing account offered by banks and credit unions [1]. These bank accounts are financial products that allow you to store your savings in a high-yield account while enjoying the flexibility and check-writing advantages of a traditional checking account.
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Money market accounts are hybrid high-yield savings accounts and traditional checking accounts. You can enjoy higher interest on your savings if you open a money market account compared to a checking account. Additionally, money market accounts allow you to write checks, and some banks even provide ATM or debit cards.
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Banks and credit unions usually require a higher minimum balance because you receive high-interest rates and produce interest income. To incentivize savings, banks also tend to limit the number of cash withdrawals you can make and sometimes charge service fees for additional withdrawals.
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How a Money Market Account Works
If you want to open a money market account, you should analyze the best online banks and credit union accounts available. Understanding how a money market account works is critical before opening an account. Here are some key features of a money market account to understand:
- Interest Income: Money market accounts are interest-bearing bank or credit union accounts. Interest-bearing means that a bank will pay you interest income on your savings. Interest rates for money market accounts are usually in line with high-yield online savings accounts. However, interest rates on money market accounts can increase and decrease when interest rates set by the Federal Reserve change.
- FDIC Insurance: Banks that offer money market accounts that are FDIC insured means that your deposits up to $250,000 are insured. You don’t have to do anything to earn this benefit. The same advantages apply to credit unions with funds insured by the NCUA. All you need to do is ask if your new account is FDIC or NCUA insured.
- Check-Writing: Money market accounts are hybrid checking and savings accounts. One of the differentiating abilities of the money market account is that you can write checks from this account. This can help you during your budgeting and cash flow planning.
- Debit Cards/ATM Access: Not all banks offer debit cards or ATM access. Check with your money market account provider to see if this benefit is available for your account. If having a debit card and ATM access is a "must-have" feature, find an account that offers this.
Pros and Cons of Money Market Accounts
There are many advantages and disadvantages to opening a money market account. Because these accounts offer high-interest rates, they are particularly attractive during periods of rising interest rates when investors are balancing the risk of guaranteed interest returns on interest-bearing accounts with the capital appreciation in the stock market.
The idea of earning high-interest rate returns and having easy access to your funds lures many investors. It could boost investment returns and offer the liquidity you need to pivot investment strategies quickly. Here are some of the fundamental advantages and disadvantages of money market accounts:
| Advantages | Disadvantages |
|---|---|
| Higher Interest Rates | Account Minimums |
| Liquidity and ATM Access | Capped Number of Transactions |
| Checking Writing | Monthly or Other Fees |
| FDIC or NCUA Insured | Incentive to Move Funds |
Money Market Accounts vs. Savings Accounts
High-yielding online savings accounts want you to keep your funds in your savings account. Some savings accounts restrict the number of withdrawals you can make from the account and do not provide the same advantages as a regular checking account.
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In contrast, money market accounts offer more account flexibility and accessibility. With key features like debit cards, ATM cards, and checks, it is much easier to transfer funds out of your money market account. Money market accounts and high-yielding online savings accounts both pay similar interest rates.
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Money Market Accounts vs. Checking Accounts
The difference between money market accounts and checking accounts has dissipated over the last several years. Prior to 2020, there were restrictions on the number of transfers you could make from a money market account [2]. This regulation was lifted during the COVID-19 pandemic. However, some banks still place voluntary caps on the number of withdrawals you can make from a money market account.
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Checking accounts, however, don’t have the same restrictions on access to your cash. If you want easy access to your money with limited fees and no caps on your withdrawals, then a checking account might be a better solution for your needs. Checking accounts and money market accounts share some similarities. Importantly for both accounts, you can make as many deposits as you want.
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Smart Summary
Parking your cash in a money market account can be a core component of your financial ecosystem. With the recent transaction limitations lifted, money market accounts have become a more attractive place to earn higher interest rates. If you are trying to save for an emergency fund or slush fund, then a high-yielding savings account could be a better place to move your funds because you create a boundary to accessing these savings funds. But if you simply want to earn a return on your idle cash and have access to your funds, a money market account might be exactly what you need.
(1) Consumer Financial Protection Bureau. What is a money market account? Last Accessed January 25, 2024.
(2) Federal Register. Regulation D: Reserve Requirements of Depository Institutions. Last Accessed January 26, 2024
