Money Market Accounts
WalletHub has details on more than 270 money market accounts
and each account’s current money market rates. A money market account is like a traditional savings account
, but it offers higher interest rates in return for a higher minimum balance. Since it is a type of savings account, there are limits on how many withdrawals you can make per month by phone or computer. It is also important not to confuse money market accounts, which are insured bank products, more
with money market mutual funds, which are investment products and are not FDIC insured. In the Expert’s Answers section below, you can learn more about money market accounts and money market rates and how to tell whether they are the right investment for you. less
Ask our Experts
How are money market accounts different from regular savings accounts?
Money market deposit accounts (MMDAs), like regular savings accounts, are available to consumers through banks and credit unions. And like savings accounts, they are extremely safe places to park your cash. That’s because both products are insured through either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). So even if the bank or credit union fails, you’ll get your money back, at least up to the limit of $250,000 per depositor, per insured institution. A few institutions out there are exempt from FDIC or NCUA oversight, so if you have any doubt, ask about insurance coverage.
MMDAs and savings accounts are both subject to a restriction of no more than six transactions per month, not including deposits. That restriction is imposed by the Federal Reserve Board, so it will not vary from institution to institution. Both MMDAs and savings accounts might or might not offer checks and ATM cards as part of the deal. And unlike CDs, both products allow you to withdraw funds as needed, as long as the withdrawals fall within that six-per-month limit.
The difference between the two products is that the average MMDA provides a higher interest rate than the average savings account. That’s because MMDAs require higher minimum balances. Does that mean that every money market account will offer a higher interest rate than every savings account? No. It pays to shop around. But the general rule of thumb is that the higher the minimum balance, the higher the interest rate. The minimum-balance requirement varies from product to product, and can soar into the tens-of-thousands. If the account dips below that minimum, the bank will assess a fee.
How do money market accounts work?
To open an MMDA, consumers go through a bank or credit union, just as they would for a savings account. The bank then takes that money and puts it to work, earning revenue for the institution through highly-liquid, highly-safe investments called money market instruments. Because MMDAs have minimum balance requirements and limits on withdrawals, they provide a relatively stable source of capital for those investments. Interest is compounded daily and paid monthly.
It is worth noting here that most institutions will list their products’ annual percentage yield (APY) in addition to the annual percentage rate (APR). The two terms look similar, but they are not the same. The APR is simply the annual rate of interest offered on the account. The APY factors in the effect of compounding interest, and will be higher than the APR. Both numbers are valid, but when consumers are comparing MMDA offers, it is important that they compare apples to apples.
A quick glance at the interest rates offered by different banks will show a wide variation in what’s available. Some of that variation may be due to the fact that MMDAs with higher minimum balances tend to offer higher rates. On the other hand, some institutions are more willing than others to compete for customers by offering the best deal possible.
What are the pros and cons of money market accounts?
The benefits of MMDAs are simple: they offer all of the safety and most of the flexibility of a regular bank savings account, but with the opportunity for a higher interest rate. MMDAs are federally insured, and account holders can rest easy knowing that a stock market crash or an economic downturn will not rob them of their savings. Unlike CDs, MMDAs allow for withdrawals at any point in the life of the account.
All that safety and flexibility comes with a price. The return-on-investment offered by MMDAs is pretty close to the bottom of the totem pole, especially in a low interest rate environment. Average rates on MMDAs below $100,000 have stubbornly remained below 1% since late 2010. And in the pantheon of financial risk, it is important not to forget inflation. If inflation is higher than the rate of return on your savings, you lose. Recently, the rate of inflation weighed in at 1.2%, meager by most standards, but not good news for MMDA account holders.
A lesser issue, but one to bear in mind, is that there are a number of fees and penalties associated with MMDAs. Consumers need to stay alert to the minimum-balance requirement and the limit on withdrawals, or they could wind up paying. All that said, MMDAs still make sense for a lot of people.
Is a money market account right for you?
Is safety more important to you than return? It helps to be realistic. No one will get rich on the earnings of an account bearing an APR that’s less than 1%. On the other hand, it’s extremely unlikely that anyone will lose a nest egg if it’s been tucked away in an MMDA.
Are you able to maintain the minimum required balance and get by with six or fewer transactions per month? MMDAs work best as a safe place to stow away a sum of money that doesn’t need to move around much. If you are anticipating frequent transactions, you’re better off with a checking account. If you’re anticipating large withdrawals that will repeatedly bring you below the required minimum, you’re better off opening a savings account. Remember, if you rack up enough penalty fees, they may erode whatever interest you’ve earned and even eat into the principal.
What is your timeline? If you’re putting away money for the far-distant future, and you are unlikely to need access to the funds for many years, MMDAs are probably not for you. The longer your timeline, the better you can handle investment risk. And if you can handle a calculated risk, you should be putting your savings into investments with the potential for a higher rate of return than what any MMDA can offer you. What if you need to use the money sooner, but not for a fixed period of time—say, six months or a year? In that case, you should consider CDs, which offer better rates than MMDAs, but restrict your access to the money for the specified period. But if you need to maintain immediate access to your cash, an MMDA is a good way to go. You will be able to take it out whenever the need arises.
How are money market accounts different from money market funds?
It is unfortunate that the term money markets
is so commonly thrown around, because it can apply to two distinct consumer financial products, as well as the trade in short-term financial instruments that those products are named for. Before you entrust your savings to a “money market,” be sure that you understand whether you’re investing in a money market account
or a money market fund
- A money market account—more precisely known as a money market deposit account—is a type of savings account, and as such, it is insured for up to $250,000 by either the FDIC for banks or the NCUA for credit unions. A small minority of institutions are exempt from FDIC or NCUA oversight, so if you have any doubt, ask about insurance coverage. A money market account will earn interest at a determined rate, just like other savings account.
- A money market fund is a type of mutual fund. That means a fund manager takes your investment and earns a return on it by buying and selling money market instruments. Those instruments (short-term CDs, Treasury bills, and government or corporate bonds) are extremely stable and liquid, and present minimal risk. But there are no guarantees. When a money market fund’s net asset value dips below $1 a share, it’s called breaking the buck, and the investor loses principal. That has only happened twice, most recently during the 2008 real estate crisis. The relative safety of a money market fund comes from the conservative nature of its investments and not from any type of insurance against loss in value.
Noting the distinction between money market accounts and money market funds is especially important because increasingly, banks have been selling investment products, including money market funds. This can be a source of customer confusion. The FDIC is careful to warn that it does not insure any mutual funds, and it urges consumers to read a fund’s prospectus to understand the risks before investing. The Securities Investors Protection Corporation (SIPC) is non-governmental entity that will replace missing stocks and securities (up to a limit) if a brokerage or bank brokerage subsidiary fails. However, there is no coverage for market losses.