The Pros And Cons Of Money Market Accounts (Review)

Whether you have savings or you’re just starting the savings journey, the biggest question may be where to keep your money. A money market account is one alternative you might consider in place of a traditional savings account or high-yield savings account.

Money market accounts aren’t all identical but, typically, they combine features of savings accounts and checking accounts in one convenient place. While there are some advantages to keeping savings or money you don’t necessarily need right away in one of these accounts, there are some potential drawbacks to consider.

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What Is a Money Market Account?

A money market account is a type of deposit account that can be offered by traditional banks, online banks and credit unions. These accounts also can be called money market savings accounts or money market deposit accounts. Depending on the bank, they may be referred to as MMAs, MMSAs or MMDAs.

Money market accounts can be interest-bearing, meaning the money that’s deposited can grow over time with interest. That’s one feature that makes them similar to savings accounts. But unlike a savings account, you may be able to write checks from a money market account or get a debit/ATM card that you can use for making purchases or withdrawals.

Depending on the bank, you may need to meet a minimum deposit requirement to open a money market account. The bank also can charge monthly maintenance fees, check-writing fees or other fees to maintain a money market account. The interest rate and annual percentage yield (APY) you can earn on money market deposits also can vary from bank to bank.

So long as your money market account is opened at a bank or credit union that’s FDIC insured, your money is protected up to certain limits in the event of a bank failure. This means up to $250,000 per depositor, per account ownership category, per institution. Couples who hold joint accounts can each be covered up to that amount.

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Benefits of a Money Market Account

Money market accounts can offer some of the same advantages as savings accounts, checking accounts or even certificates of deposit. The main benefits of a money market account include:

• Flexibility. Depositing funds to a money market account or transferring money between linked accounts can be convenient if you have multiple accounts at the same bank. Having a linked debit or ATM card and being able to write checks also can make things like paying bills, funding large expenses or covering an emergency easier and less stressful. Money market accounts also can be used to fund multiple savings goals for the short and long term.
• Competitive rates. Compared to other types of deposit accounts, money market accounts can offer competitive rates. The better your APY, the more opportunity your money has to grow over time. If earning the best rate possible on savings while keeping your money liquid is a priority, a money market account could be a good fit for your needs.
• Safety. Money market accounts can offer safety and security if funds are held at an FDIC-insured bank or credit union. These accounts are a low-risk way to hold funds that you don’t need to spend or use right away. Note, however, that a money market account and a money market fund aren’t the same thing. Money market funds are a type of mutual fund that invests in short-term debt securities and is an investment vehicle, not a savings account.
• Access. Having your money available when you need it is important. A money market account allows access to your money at any time,unlike a certificate of deposit, which requires you to keep your money in the account for a set time period. If you need to dip into savings for any reason, you can do so via electronic transfer, check or ATM withdrawal depending on which options are offered by your bank.

These benefits can give money market accounts some definite advantages over savings accounts or CDs. And being able to earn interest while still having the option to write checks can make them more appealing than many standard checking accounts.

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Drawbacks of Money Market Accounts

Any time you’re considering opening a new type of bank account, it’s important to consider any potential downsides. Money market accounts can sometimes fall short of savers’ expectations when it comes to the following:

• Minimum balance requirements. Every bank has different rules for the minimum amount needed to open a money market savings account. While some banks may set the threshold as low as $1, others may expect you to bring $5,000 or even $10,000 to the table to open your account. If you’re just getting started with saving money, your options for opening a money market account may be limited if you can’t meet the bank’s minimum deposit requirement.
• Interest rates. While some money market deposit accounts can offer great rates for savers, others may offer a rate that’s similar to the APY you could earn with a standard savings account. Or, to qualify for a higher rate, you may have to first reach a certain minimum balance, such as $5,000 or $10,000, in your account. Either scenario could make a money market account less attractive if getting the best rate possible on savings is what’s most important to you.
• Fees. With any bank account, it’s always good to be aware of the fees the bank may charge. For money market accounts, banks can charge monthly maintenance fees simply for having the account. While it may be possible to waive the fee by meeting daily balance or direct deposit requirements, not every bank offers a work-around for avoiding the fee. The higher the fee, the more it can eat away at the interest your savings earns each month.
• Withdrawal restrictions. Money market accounts share another similarity with savings accounts when it comes to withdrawal guidelines. These accounts in the past have been subject to federal Regulation D limits, which capped withdrawals at six per month. While these limits have been suspended in response to the coronavirus pandemic, individual banks can still impose their own limits on withdrawals from money market accounts. Additionally, they can charge a fee for excess withdrawals over those limits.

How heavily the cons weigh in your decision-making depends on which bank’s money market account you’re considering. For example, some banks may offer better rates, fewer fees and lower minimum balance requirements than others. That’s why it’s so important to choose the account that’s most appropriate for your needs and to compare money market accounts from different banks before opening one.

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What Are Money Market Accounts Good For?

Money market accounts can be used to save money for short-term or long-term needs. For example, you might consider opening a money market account if you:

• Need a convenient and secure place to keep your emergency fund
• Want to earn an APY comparable to CDs without tying up your money for months
• Need to set up sinking funds for recurring expenses that aren’t part of your regular budget
• Want to set aside money to pay for a new-to-you car in cash
• Are interested in saving money toward a down payment on a home

These are all good reasons to consider a money market account in place of a CD or savings account. Remember, savings accounts typically don’t come with checks or a debit card. And CDs require you to keep your money parked for a set period of time. Otherwise, withdrawing money from a CD early could trigger a penalty.

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How to Open a Money Market Account

If you think a money market savings account is right for you, opening one is a fairly simple process. It starts with comparing different money market deposit accounts from multiple banks to find the right one.

When comparing money market accounts, remember to look at:

• Minimum deposit requirements
• Monthly fees
• APY and whether rates are tiered based on the balance
• Access and withdrawal options, including checks or a debit card
• Withdrawal limits and excess withdrawal fees

If you’ve found a money market account that seems like a good match, the next step is opening the account. Depending on the bank, you may be able to do this online. You’ll need to give the bank some basic information, including your name, address, date of birth, Social Security number and phone number. You’ll also need to provide the account number and routing number for the bank you want to use to make your initial deposit if you’re funding a new money market savings account online.

Once your account is open and funded, you can manage it the same way you would any other bank account. This means checking your statements or account activity regularly, setting up transaction alerts and linking it to your other bank accounts for easy transfers. You may also be able to add money to your account via mobile check deposit or use person-to-person payment apps to transfer money to friends and family. Just keep in mind the funds availability rules for adding money to your account so you know when you’ll have access to your savings.

And, as with any other bank account, it’s important to make sure you’re keeping your information secure. You can protect your money market accounts and other online bank accounts by doing things like creating secure passwords, setting up multifactor authentication and avoiding the use of unsecured Wi-Fi networks to access your accounts.