Money Market Accounts: Definition, Pros, and Cons
A money market account (MMA) offers a safe place to keep your money and enjoy features such as interest on your deposits, easy access to your money, and the ability to write checks.
Money market accounts combine some of the best features of both checking and savings accounts, but every type of account has its pros and cons. While you get certain features with these types of accounts, you might have to give up a few others.
Money Market Accounts vs. Savings and Checking
A few key differences exist between MMAs and savings accounts, such as higher minimum deposit requirements for MMAs, and lower interest rates for a regular savings account. With a money market account, you'll be able to write a limited number of checks, unlike a traditional checking account.
The Pros: Earnings and Access
You'll often get better interest rates on an MMA than you’ll get from a traditional savings account, because the interest is compounded daily. Larger account balances also help you earn more interest, and the return is usually somewhere between a certificate of deposit (CD) and a savings account when it comes to earnings potential.
Like checking accounts, MMAs make it easy to access your money. Most accounts allow you to write checks or withdraw cash, and some offer a debit card you can use to make purchases. This easy access, combined with a competitive interest rate, is what has traditionally made MMAs unique. In recent years, rewards checking, interest checking accounts, and online banks have become more popular and offer the same benefits, but sometimes you’ll get a better deal from a money market account.
The Cons: Minimum Balance and Withdrawal Limitations
MMAs have some nice features, but you should be aware of a few things before opening an account:
- Large minimum balance: MMAs might only be available if you have at least $2,500 to place in an account. If your account balance falls below the minimum, expect to pay monthly fees, which eat into your return.
- Transaction limits: You have access to cash in an MMA, but you won’t be able to make payments with your checkbook or debit card more than six times per month by law; some banks allow only three payments per month. You can withdraw cash as often as you like, but these accounts aren’t as flexible as your checking account when it comes to everyday use.
- Not right for everyone: Money market accounts might not be the right tool for your needs. Could you earn more by using CDs? If you use a series of CDs—known as a CD ladder—you can earn decent returns while keeping some of your money liquid and minimizing early withdrawal penalties. If you’re investing for the long term, talk with a financial planner about what mix of investments can best help you reach your goals.
- Safety insurance: Make sure you use an MMA from a bank or credit union, which will insure your funds. Don't confuse these accounts with money market mutual funds, which have a role in investment planning but are not the same thing. Ask your bank or credit union to verify your funds are insured, and keep your deposits below the maximum covered limits.
- Introductory interest rates: If the rate sounds too good to be true, double-check to make sure it's a permanent interest rate, not a promotional rate that will disappear in a month.
The Best Uses for Money Market Accounts
MMAs are useful for the money you might need in the relatively near future. They allow you to earn a small return while keeping the funds safe and accessible. They’re especially useful for large, infrequent expenses such as:
- Emergency funds
- Budgeting for quarterly tax payments
Again, this isn’t the best place to keep funds for regular expenses because of the limits on how many check-based payments you can make. That said, to earn a bit more interest you could keep funds in an MMA for a few of your largest monthly expenses, such as your mortgage.