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Somewhere between savings and checking is the MMA, or money market account.
Like a high-yield or traditional savings account, you can use a money market account to securely save money while earning interest on your deposits. But MMAs also have some features that are generally associated with checking accounts, like the ability to write checks or use a debit card.
Traditionally, money market accounts also offer higher returns than most savings accounts — but with the growth of high-yield savings accounts and near-zero percent interest rates following the COVID-19 pandemic, those margins have become thin, if not nonexistent.
“A lower interest rate environment changes the drama of these different types of accounts,” says Chantel Bonneau, wealth management advisor at Northwestern Mutual. But even if low rates are a factor today, they won’t remain forever. “Check in on your interest rate regularly. If rates do go up, you might find yourself in a very different situation,” Bonneau says.
Here’s everything you need to know about how an MMA might benefit your financial plan, plus some details to be aware of before opening one.
What Is a Money Market Account?
A money market account is similar to a high-yield savings account in that it offers a higher interest rate than your typical savings account at a big bank. But unlike savings accounts, MMAs allow more flexibility in accessing and using funds in the account. Not unlike checking accounts, MMAs offer the ability to write checks or use a debit card. While the historic low-rate environment brought about by the COVID-19 pandemic has lowered the APY on MMAs, they may still be worth looking at as part of your personal saving strategy.
Why Choose a Money Market Account?
The main benefits of a money market account include higher interest rates, accessibility, and security.
Money market accounts generally offer somewhat higher interest rates than traditional or even high-yield savings accounts, though the difference today is minimal given the current low-rate environment. Plus, they’re federally insured deposit accounts protected (up to $250,000 per institution) by the FDIC.
Money market accounts typically offer features more commonly found in checking accounts, making them a more liquid option for anyone who values easy access to their cash. Money market accounts may allow you to write paper checks, make payments online, and even transact with a debit card.
Though many do offer access through debit card or check, money market accounts generally fall under the same Regulation D rules as other savings accounts, meaning you can only make six transactions per month — excluding ATM withdrawals.
Generally, money market accounts are great savings vehicles for storing an emergency fund or short-term savings that you want to earn a bit of interest on while building up through regular contributions.
However, make sure you understand the minimum balance requirements and fees associated with any MMA you consider, since they can be higher than savings accounts. These fees vary across institutions, so it’s worth shopping around for a product that suits your needs. For instance, if you’re already starting with a bit of a savings cushion, a minimum balance requirement may not be a drawback for you.
Also keep in mind that you don’t have to commit to one type of account. For example, you may choose to keep your emergency fund in a high-yield savings account, a future travel fund in a money market account, and your down payment toward your next home locked in a CD.
Money market account vs. savings account
A money market account is most similar to a savings account, especially one through an online or brick-and-mortar bank that earns high interest.
In previous rate environments, savers may have seen a more substantial difference in the amount they could earn on a money market account versus a high-yield savings account, but the difference in today’s low-rate environment is marginal.
“Fundamentally, they operate very similarly,” says Bonneau. “In an environment like today where interest rates aren’t very high, the biggest value-add of having both of those is just separating your money so that your savings are something you don’t dig into unless it’s for a goal or an emergency.”
If you need quick access to your savings and you have enough to meet any minimum deposit requirements, you may feel more confident choosing a money market account. Otherwise, a savings account with a comparable interest rate will be just as effective — and a little less liquidity may keep you from dipping into your fund when you don’t actually need it.
Money market account vs. checking account
Money market accounts may be considered a type of hybrid between checking and savings accounts.
In fact, if you use your checking account for regular monthly expenses but complete most of your spending with a credit card or cash, an interest-earning money market account could function as a substitute for a traditional checking account.
“I think it’s a very practical thing to do,” says Sean Rogers, CFP, founder of Rogers Wealth Management Services in Bonita Springs, Florida. “There’s definitely an advantage to having all of that money in a money market account, because at least it’s earning something. A checking account is generally going to have no rate of return.”
You can use your provided debit card, checks, or automatic transfers to make regular monthly payments, just like you would with a checking account. But keep in mind that your money market account may be restricted to six withdrawals via debit card swipe, check, or online transfer each month, so research your account’s rules and be careful about how often you withdraw.
This isn’t the option for everyone: You may quickly run into problems if you’re not disciplined with your spending.
Without an airtight strategy built on fixed, monthly expenses, “I would be more inclined to encourage clients to have two accounts: one for spending and one for saving,” Rogers says. “If they have some trouble being disciplined in how they manage their cash flow and all their spending, then it would be better to have separate accounts.”
Money market account vs. certificate of deposit
In high-rate environments, you can earn more with a money market account than with a traditional savings. But if your focus is earning the most interest without risk, a CD may be your best option.
Like a money market account, you can benefit from already having a lump sum to deposit before you open a CD. However, while you can continue to build upon your initial MMA deposit, the money you put in a CD remains locked up throughout the CD’s term.
Typically, longer-term CDs will earn more interest than shorter-term CDs, which may carry the same or even less interest than an MMA. The difference in interest likely won’t be drastic, but it may be substantial enough (in the right economic environment) to justify giving up liquidity for added value.
Weigh the pros and cons for yourself to determine whether you can go without access to those funds while they’re locked in a CD. If you must remove them before maturity, you’ll risk paying a fee, such as several months’ interest.
For emergency funds and short-term savings, you’re better off choosing a money market or high-yield savings account. If you have extra savings you don’t want to risk in the market or a cash cushion you’re saving for a fixed point in time in the future, consider a CD.
Money Market Account Pros
- They are secure accounts that are easy to open and offered by banks, credit unions, and other common financial institutions.
- They are liquid and easily accessible with the added benefit of access to checks or a debit card.
- Deposited funds may earn more in interest than they would in a traditional or high-yield savings account.
- Your money is secure and FDIC-insured up to $250,000 in deposits.
Money Market Account Cons
- They are subject to Regulation D withdrawal limits, so you cannot make unlimited transfers from the account each month.
- You may be required to meet a minimum deposit in order to open.
- MMAs may carry minimum balance requirements as well, incurring added fees for dipping below the minimum.
- While MMAs earn higher interest than other savings accounts, you can earn higher returns on long-term savings with CDs or investment accounts.
- Interest rates aren’t as competitive in today’s falling rate environment.
- Your interest earnings are taxable income (this is true for any deposit account).
How to Get a Money Market Account
You can open a money market account with many online or brick-and-mortar banks by applying online or talking to a representative at a branch near you.
Do your research beforehand to determine which institution may offer the most competitive fee structure, required minimums, and interest rates.
“Every institution has its own rules; you can only make a certain amount of withdrawals each month or they need to have a minimum for their institution or minimum without a fee,” Bonneau says. “So you always need to check the fine print for what’s relevant for you.”
And remember, your money market account is FDIC-insured for up to $250,000 in deposits, so you never have to worry about losing the money, even if the financial institution your account is with fails during an economic downturn.
Money market accounts are ultimately not much different from high-yield savings accounts, and in today’s rate environment, they even offer similar interest rates to less-liquid CDs.
If you’re considering a money market account, compare offers from different banks to find one with a minimum deposit, fee structure, and interest rate that works best with your financial goals.
But remember, the specific savings vehicle you choose isn’t as important as the act of saving itself.
“Your plan should dictate what products you need,” Bonneau says. “No product is the perfect product; it’s all relative to what problem it’s solving for you in your plan.”
If you’re just starting to build your savings upon a solid foundation, choose a suitable account, then work on developing a habit of saving regularly. This can help you secure a more stable financial future, even when hardship hits.