What Is a Money Market Account? Here's Everything You Need to Know. Is a money market just what you need to boost your personal savings? Check out everything you need to know to make your decision.
By Dan Bova
If you've been researching how to grow your personal finance through various investment methods, you've likely come across money markets.
When considering a money market account, it's important to know the details and put some time toward comparisons to make the right decision for you and your financial situation. Keep reading for everything you need to know about money market accounts.
What is a money market account?
A money market account (MMA) is an umbrella term for a particular type of savings account offered by some banks or credit unions. They are also often called money market savings accounts or money market deposit accounts.
While it may sound like it is, a money market account is not related to the stock market. Instead, it is a savings account that offers much higher savings rates than traditional savings accounts.
A critical specific to note is that a money market account is not the same thing as a money market fund or a money market mutual fund. They may sound similar, but they have different stipulations.
Money market account vs. money market funds
The most significant difference between these similar-sounding terms is the insurance behind them.
- A money market account through a bank is insured by the Federal Deposit Insurance Corporation (FDIC)
- A money market account through a credit union is insured by the National Credit Union Administration (NCUA)
- Money market funds are offered by investment companies and are not NCUA or FDIC insured
Related: Six Best Savings Accounts Of 2022
How does a money market account work?
Money market accounts are a combination of savings and checking account features.
They are similar to checking accounts because they allow owners to write checks and access liquid money.
Similar to a savings account, there is a withdrawal limit (generally about six per month). The feature differentiating MMAs from checking and savings accounts is the faster rate at which interest accrues based on the account's balance.
What are the pros and cons of a money market account?
Financial investments often have pros and cons, and money markets are no exception. Before entering into any new financial situation, completing thorough research can set you up for success in the long run.
Check out the benefits and risks of money markets below to see if they align with your savings goals.
Pro: Safety
Money market accounts are low-risk because they are insured and designated as member FDIC, a Congress-created agency that insures, supervises and protects the United States financial system.
This means your money can be protected up to $250,000 even if your chosen banking institution fails.
Con: Balance requirements
Money market accounts are not entirely equitable because many require higher minimum balance numbers for an initial deposit to open an account and to maintain it throughout the account's life.
Failing to adhere to the minimum balance requirement can result in fees, so make sure the balance is feasible for your financial plan.
Pro: Savings rate
With a money market account, you will likely have a higher savings interest rate than a regular savings account. This means the percentage of the money you make each year from a money market can accrue faster and ultimately be a more significant sum than a regular savings account.
Con: Limited transactions
If you are hoping for an account with unlimited access to liquid funds, then a money market account might not be the best option.
You might be limited to withdrawal amounts each month, just like you would be with a traditional savings account. Checking accounts do not have this limitation.
Pro: Easily accessible
Even though money market accounts have monthly withdrawal limits, you are still equipped with immediate access to your account as long as you are within that limit.
In addition, many money market accounts provide the option for check-writing privileges and the use of debit cards, and most banks and credit unions offer an abundance of ATM locations.
Con: Varied savings interest rates
Because market rates depend on the market's interest rates, there is no way to predict how much money you could earn. The market rises and falls unpredictably, making a tried and true APY number impossible to foresee.
Pro: Flexible
Because you can open a money market account with an in-person or online bank account, the options to access your money are flexible.
Even if you choose an online bank with few ATM locations, many institutions offer ATM fee reimbursements up to a certain amount.
Con: Possible better opportunities
If you are prepared to open an account that you let accrue over several years without touching any of the money, then there are better options than MMAs.
There are other account options with higher return rates for those who do not plan on accessing their money in the short term.
Related: Free Your Money: Keeping Your Money In The Best Places
How do you choose a money market account?
Because one of the most considerable advantages of a money market account is the higher interest rate, that should be a significant focus when making your choice. Remember that you can open a money market through a financial institution like a local bank, credit union or online bank.
When choosing your money market account, consider focusing on the following:
- The highest available Annual Percentage Yield: The APY dictates yearly compound interest
- Understanding account restrictions: Specifically look for balance requirements and earnings
- Identifying fees: Penalty fees, transfer fees, monthly fees, inactive account fees, etc.
Related: 5 Questions to Ask When Choosing the Right Bank for Your Small Business
Five best money market accounts
When choosing a money market account, it is best to compare the three focal points above. Look at the best interest-bearingmoney market account list based on the highest available APY, account restrictions, fees and additional perks.
Related: The Best Money Market Accounts
1. Discover
- Annual Yield Percentage: 1.4% for yearly balances under $100,000 / 1.45% for annual balances over $100,000
- Minimum Deposit Requirement: $1
- Maintenance Fee: $0
- Additional Perks: 60,000 fee-free ATM withdrawal locations
2. Ally
- Annual Yield Percentage: 1.6%
- Minimum Deposit Requirement: $0
- Maintenance Fee: $0
- Additional Perks: Issue debit cards and 43,000 fee-free ATM withdrawal locations
3. CIT
- Annual Yield Percentage: 1.6%
- Minimum Deposit Requirement: $1,000
- Maintenance Fee: $10 for balances under $1,000
- Additional Perks: Interest compounded daily and paid out monthly
4. TIAA
- Annual Yield Percentage: 1.2%
- Minimum Deposit Requirement: $500
- Maintenance Fee: $0
- Additional Perks: Issue debit cards and 80,000 ATMs with a $15 fee for out-of-network reimbursement
5. Sallie Mae
- Annual Yield Percentage: 1.5%
- Minimum Deposit Requirement: $0
- Maintenance Fee: $0
- Additional Perks: Paper checks, free transfers, easy online access
Related: 10 Ways to Grow Your Bank Account Tenfold Starting Today
How do you open a money market account? A step-by-step guide
If opening a money market account sounds like something you're interested in, then take a look at these five steps that can help guide you through the process.
1. Browse your options
To receive the best return possible, research a variety of banks and credit unions to see which ones offer high-yield savings accounts with competitive rates. With some money market rates, you may be able to choose between fixed and variable.
A fixed rate does not change regardless of market fluctuation. A variable rate goes up and down with market fluctuation.
Another factor to consider is the minimum deposit requirement and minimum balance requirement.
This means that even if you meet the deposit requirement to open an account, you should be confident enough in your financial situation that you can maintain that minimum balance requirement for the duration of your money market account to avoid fees.
2. Gather the necessary documents
You will likely need specific identification and documentation so the institution can determine whether or not you are qualified to open an account.
Necessary documentation:
- State ID or driver's license
- Social Security number
- Birth certificate
- Phone number
- Proof of address (credit card statement, utility bill, etc.)
3. Fund your account
This is when you may need to provide that minimum deposit amount.
Options for providing minimum deposits typically include:
- Electronic transfers from account to account
- Depositing cash
- Check-writing
4. Consider online banking options
Banking has evolved, and most banks and credit unions offer online options — some exclusively operate online. Processes like depositing checks, ordering checks and transferring account balances can be much more convenient when completed online.
5. Set up direct deposit
Setting up direct deposit to a money market account is similar to having your paychecks deposited into your standard checking or savings each month via direct deposit.
To do this, fill out a direct deposit form with your employer with the account and routing number, and include the amount or percentage of your paycheck you'd like to allocate to your money market each pay period.
Related: Save Smarter: 3 Steps to Choosing a Savings Account for Your Business
Is a money market account right for you?
There are several reliable ways to make passive income, and opening a money market account is one of them. Because money market accounts operate through banks and credit unions, they are backed by the FDIC and NCUA.
This makes them much safer than some other money market options. In addition to that, money market accounts offer a fair amount of freedom when it comes to accessing your money.
On the other hand, a few key things to be wary of with money market accounts are the restrictions and fees they may entail.
Now that you've got the rundown on money market accounts, from what they are to pros and cons to the best ones out there and how to open one, make sure to do your research to see if it's the right fit for you or if you might better benefit from another option like a high-yield savings account.
Related: 6 Best Savings Accounts
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