You’ve started to save money and are building up cash reserves. The next step: deciding where and what kind of account you should keep savings in.
Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees. To figure out if these accounts are right for you, it’s important to understand both the pros and cons and how they fit into your financial goals.
Pros of money market accounts
Money market accounts are interest-accumulating accounts you can open at a bank or a credit union. What differentiates these accounts from other savings accounts is they generally pay higher interest rates, which can benefit those with short-term savings goals.
Pros
- Attractive APYs
- Easy access to your funds
- FDIC- and NCUA-insured depending on where you bank
Cons
- There might be withdrawal limits
- Monthly fees are common
- Minimum balance may be required
1. Money market accounts offer competitive APYs
The most significant benefit of money market accounts is that they offer high annual percentage yields (APY). While the exact amount of interest you earn will depend on a few factors—such as how much money you have in the account and which bank you open your account with—they generally pay higher interest rates than traditional savings accounts.
This is an attractive option because we are currently at a unique point in the economy where savings account yields have been higher than they’ve been in years due to rising interest rates.
"At a high level, money market funds are generally a better option than just sitting in a checking or a savings account because they actually yield higher,” explains Matt Kocanda, certified financial planner at CI BDF Private Wealth, a private wealth-management firm in Itasca, Ill.
While money market accounts are great for saving and managing your money, it’s important to remember that a money market account is not considered an investment tool, and to build a long-term investment portfolio, consider opening a retirement account such as a 401(k) or Roth IRA.
2. Easy access to your money
What makes money market accounts different from high-yield savings accounts is that the accounts offer features of both savings accounts and checking accounts. Like checking accounts, they often come with debit cards and check-writing abilities.
Many banks offer debit cards to money market account holders, enabling users to make withdrawals and transfers from ATMs and pay for goods with their debit card. Users can often also write checks against their account balances.
Because these accounts offer high interest rates with easy access, they are best suited for people who are saving money for the short term.
“These accounts are really good for cash needs that you're going to have in the next couple of months. For example, tax bills are coming up and these are great places to just hold your tax funds,” Kocanda says.
3. Your money is protected
Another quality that makes money market accounts attractive is that they are insured. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insure up to $250,000 in a money market account, so you can be confident you won’t lose your money if the bank you’re using fails.
“I’ve even seen people open multiple money market accounts so that they continue to get the higher interest rate, but also maintain the FDIC insurance that would come with the equivalent of staying just in a checking or savings account,” explains Chloe Wohlforth, certified financial planner at Angeles Wealth Management, a multi-asset investment firm.
However, money market mutual funds, which stock brokers offer, are not federally insured. And not all banks are FDIC-insured, so make sure to confirm this before signing up for an account.
Cons of money market accounts
While money market accounts are a great option for short-term savings, they have limitations that potential users should consider.
1. Depending on your bank, there could be withdrawal limits
Many banks have withdrawal limits on how much you can withdraw from your money market account and how often.
“Many of the withdrawal limitations [limit you to withdrawing] more than six times a month, so it's a different situation than someone that would be relying on using their debit card often for a regular checking account,” says Kocanda.
The Federal Reserve previously required banks and credit unions to limit withdrawals to six per month; however, it reversed that policy in April 2020. It’s important to check with your bank or credit union to see if the policy is still in place.
2. Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account. Other banks could charge fees for not maintaining a high enough balance or surpassing the withdrawal limit. Excessive transactions and overdraft fees range from $10 to $25.
3. Your account might have a minimum balance requirement
To open a money market account, you'll usually need to meet a minimum balance, depending on your bank or credit union. So, if you are saving slowly and starting from a low balance, an alternative savings account might be a better option until you can meet the minimum balance requirement. Minimum balance requirements can range from $100 to $2,000, but there are money market accounts available that don't have minimum balance requirements.
Also, while these accounts don’t have maximum balance limits, it’s important to remember that insurance only covers $250,000, so any more than that in the account is not fully insured. Nothing prevents you from having different accounts at different banks, since both the FDIC and NCUA cover up to $250,000 for each depositor, per insured bank, for each account ownership category.
The takeaway
Money market accounts are a great option if you're looking to maximize the amount of interest you can earn in a low-risk setting. You'll have easy access to your money, your account is insured up to $250,000, and it's a great financial tool to help you reach your short-term savings goals.
However, if you're starting out with a relatively small amount and are worried about the cost of fees potentially eating away at your earned interest, you may want to consider money market account alternatives.
Frequently asked questions
Are money market accounts worth it?
If you want to put your money in a high-yield account for a short-term savings goal, money market accounts have many benefits. If you want to withdraw money frequently or save for long-term goals like retirement, a checking account and investment account or high-yield savings account would be better options.
Can a money market account lose money?
A money market account is a savings account, so you will not lose money based on fluctuations in the stock market. However, some money market accounts have monthly fees to watch out for.
Which is better: money markets or savings accounts?
Depending on your financial goals, both can be great options. The benefit of a money market account is that it incorporates features of a checking account, like easy access to your money, and has high yields. Yet a high-yield savings account can also be a great way to store your money, and you can avoid the minimum balance requirements and monthly fees of some money market accounts.
