What Is a Money Market Account, and How Does It Work?

What Is a Money Market Account, and How Does It Work?

If you’ve ever opened a typical savings account at a local bank, you know how much money and time it takes to earn a decent amount of interest.

Money market accounts allow customers to increase their interest earnings by taking advantage of higher-yielding rates. According to the FDIC, the national average interest rate for savings accounts under $100,000 is presently 0.06 percent, while money market accounts pay 0.09 percent. Even though that may not sound like much, the best money market accounts pay up to 1.30% to 1.51% in annual interest.

But what is a money market account, and how does it function? Continue reading to get a detailed overview!

What Is a Money Market Account?

A money market account pays a greater interest rate than a regular savings account and ypically require a more considerable minimum amount.

Consider a money market account as a hybrid between a savings and checking account, incorporating the best of both. You get the same interest-earning potential as a high-yield savings account, plus many money market accounts include a debit card and check-writing capabilities.

There may, however, be a monthly minimum balance requirement and maintenance fees associated with these accounts.

Money market accounts are interest-bearing accounts at banks and credit unions, not to be confused with money market mutual funds. Even though money market accounts and funds have similar names, they are different. Money market funds, for example, are not insured by the Federal Deposit Insurance Corporation (FDIC), and you could lose your principal.

How Does a Money Market Account Work?

Like other deposit accounts, money market accounts (MMAs) function similarly to savings accounts. The customer earns interest on the money they deposit in a money market account. Generally, money market account interest is compounded daily and paid monthly. In contrast to certificates of deposit, money market accounts allow you to withdraw funds without incurring any penalties.

Many internet banks, as well as brick-and-mortar banks and credit unions, provide money market accounts. Online banks may offer more incredible rates because they have fewer administrative costs than traditional banks.

The accounts usually have a monthly restriction of six transactions and transfers. Withdrawals from ATMs are frequently uncapped.

In response to the COVID-19 crisis and to ease consumer access to savings, the Federal Reserve made an interim final rule in April 2020 that suspended the Regulation D monthly withdrawal limit on money market accounts. However, if a bank or credit union’s usual monthly limit is exceeded, a fee may still be imposed.

Related Article: Types of Bank Accounts Available for Veterans

Who Offers a Money Market Account?

Ideally, the best money market accounts give a high annual percentage yield (APY), combining the savings and checking accounts benefits packed into one. They also keep fees and requirements to a minimum. It’s even better if you can find a bank account with excellent customer service and user-friendly digital banking features.

Banks That Offer Money Market Accounts

Bank Stand Out Feature Annual Percentage Yield (APY) Suitable For
Northern Bank High-interest rate 0.45% APY Best for combined branching and online banking
Sallie Mae Open accounts are not subject to a minimum deposit 0.50% APY with $0.01 minimum balance Best for Savings Goals
Ally Money Market The ability to use both 0.50% APY with Best for widely
Account a debit card and a check-writing privilege, as well as customer satisfaction $0.01 minimum balance available ATM network
Synchrony No minimum deposit is required 0.35% APY Best for regular and IRA money market accounts
CIT Bank Accounts can be opened with just a $100 minimum deposit, and there are no monthly fees 0.45% APY with $100 minimum balance Best for a variety of savings options

Credit Unions That Offer Money Market Accounts

Credit Union Stand out Feature APY
Navy Federal Credit Union A jumbo money market savings account with an incremental yield increase until $100,000 or more is reached. 0% – 0.50% APY With $2,500 minimum balance
Premier Members Credit Union Money market accounts often offer higher rates with higher balances, but Premier Members Credit Union rewards low-balance holders with higher rates. 0.10% to 2.00% APY
Affinity Plus Federal Credit Union A reverse-tiered account where lower balances pay a higher rate 0.35% to 1.00% APY

Advantages of a Money Market Account

  1. Your money is safe: Money market accounts at federally insured banks and credit unions are insured up to $250,000. Joint accounts are insured up to $500,000.
  2. Earn competitive interest rates: Money market accounts provide competitive interest rates so that you can earn competitive yields. Check out the current rates on the best money market accounts.
  3. You’ll have more options for getting your money: You can access your cash through a debit card or checks with a money market account.

Disadvantages of Money Market Account

  1. Minimum deposit requirements may be high: A money market account, for example, will usually require a much larger amount than a savings account. It’s very uncommon for accounts to need a minimum deposit of $1,000 or even as much as $25,000 to open.
  2. Your cash withdrawals will be limited: You can typically only make six withdrawals per statement cycle due to a federal requirement. Savings accounts are no exception.
  3. Obtaining higher yields elsewhere: Although money market accounts frequently provide a more significant interest rate than savings accounts, this is not always the case. Always browse around and weigh your options.

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Money Market Interest Rates

MMAs initially appeared because they offered a higher interest rate than savings accounts. Savings accounts cannot invest in CDs, government securities, or commercial paper. Therefore MMAs can provide more excellent interest rates. In addition, MMAs continue to outperform savings accounts on average.

Interest rates on money market accounts (and other bank accounts) vary, meaning they can fluctuate depending on economic conditions.

The greater the balance in the account, the higher the interest rate will be. So always double-check with your bank to see if the interest rate will change.

Are Money Market Funds Safe?

If you deal with a financial institution with adequate insurance, you cannot lose money in a money market account. For example, if the bank or credit union is federally insured, you are protected from losing your money in a money market account.

Deposits at banks are insured by the Federal Deposit Insurance Corporation, while the National Credit Union Administration covers credit union deposits. In addition, if the banking institution goes out of business, your money is safeguarded up to $250,000 per depositor.

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In this article, we’ve answered your ‘what is a money market account’ question. It all boils down to having access to your money (in the event of an emergency or other infrequent necessity) and receiving competitive interest rates. A money market account might suit your needs if you can relate to the following:

  • You keep a large amount of money in your checking account.
  • Each month, you write a few checks or make a few debits.
  • You don’t want to commit to other forms of savings accounts, such as CDs or IRAs, which lock up your money for an extended period.

Remember that a money market account is generally not the best alternative for regular monthly expenses due to transaction limits.

Do your research before opening a money market account, and find one that offers a competitive interest rate.

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