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What Is a Money Market Account and How Does it Work?

October 20, 2020 · 8 minute read

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What Is a Money Market Account and How Does it Work?

We all know we should be saving more, but when it comes to saving, it can be difficult trying to figure out exactly the best place to store your money. One option that savers might consider is called a money market account.

A money market account is a type of account offered by banks and credit unions that might pay higher interest rates than a traditional checking or savings account, but these types of accounts can also come with downsides like high minimum required balances and unexpected fees.

What Is a Money Market Account?

At its most basic, a money market account is a type of FDIC-insured savings account that has unique features.

Many money market accounts pay higher interest rates than a traditional savings account, but money market accounts may be more restrictive than a traditional checking account.

Many money market accounts also frequently only allow a certain number of limited withdrawals each month using checks or a debit card.

Money market accounts can be invested in government securities, certificates of deposits, and commercial paper—which are all considered relatively low risk investments.

Money market accounts differ from savings accounts in that money in a money market account can be invested by the bank in government securities, certificates of deposits, and commercial paper—which are all considered relatively low risk investments.

With a traditional savings account, money is not invested. But unlike most investments, money market accounts at banks are FDIC-insured up to $250,000 for an individual or $500,00 for joint accounts.

Investing the money in these restricted areas allows money market accounts to earn a higher interest rate while still maintaining FDIC-insurance protection.

It is important to note that money market accounts are not the same as money market funds. A money market fund, also known as a money market mutual fund, is an investment account utilized through an investment fund company, and is not FDIC protected.

One easy way to tell the difference between a money market account and a money market fund or money market mutual fund is whether or not the principal you deposit can be reduced or lost.

In a money market account, your principal is guaranteed (even if your interest rate may vary over time), but with a money market fund or money market mutual fund, your principal could possibly be lost or reduced depending on market performance.

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Pros of a Money Market Account

There are many pros to using a money market account, and many people find that money market accounts might be a useful addition to their financial planning strategies.

Earn Higher Interest on Your Money

The most enticing part of a money market account may be locking in an interest rate that is higher than a standard checking account.

According to the FDIC , the average national interest rate for checking accounts as of March 2020 under $100,000 was just .06% and the average interest for a savings account was .09%.

Money market accounts, on the other hand, have an average interest rate of .16% for deposits under $100,000 and .28% for deposits over $100,000 .

Freedom of Access to Cash

Of course, some other types of savings accounts, like CDs, also offer higher interest rates than a standard checking or savings account, but a money market account may offer more flexibility than a CD.

CD’s may offer extremely limited access to your money, so if you’re trying to save but still need to keep your assets relatively liquid, a money market account might be a good solution.

Most money market accounts offer a limited number of transactions per month, which means that you may still be able to access your money in a pinch without facing fees or other consequences.

Safety and Insurance

Additionally, another enticing benefit of money market accounts is that they are FDIC-insured. FDIC insurance is important because it means that your principal deposit is protected from loss up to a certain amount.

As discussed above, a money market account is protected up to $250,000 for an individual depositor or $500,000 for a joint account by the FDIC. If your account is at a credit union, it is protected at the same amounts, but by the National Credit Union Administration (NCUA).

This means that if for some reason your bank or credit union is unable to honor the amount of money you’ve deposited as principal into a money market account, the FDIC or NCUA will insure your money.

This provides a high level of safety for your deposits that is not possible with other types of investment accounts where there is always the risk that your principal could partially or wholly be lost due to market changes.

Cons of a Money Market Account

There are downsides to using a money market account, however, and a money market account is not right for everyone.

Too Easy of Access

First, the relatively easy access to your money that a money market account provides could actually end up being a downside.

If you’re hoping to save money for an extended period of time and don’t need access to your cash, having built in access with checks or a debit card might tempt you to dip into your savings more frequently than if you put your money into a more restrictive type of account, like a CD.

Minimum Balance Requirements

Additionally, money market accounts may require minimum balances that make them inaccessible for some savers.
For example, if someone wants to save $2,500 but a money market account at their bank has a $5,500 minimum balance, starting savings in a regular savings account may make more sense.

There’s always the option to invest your money as opposed to just saving it, without the high minimum balances that a money market account might have.

Better Earning Accounts

One final con is that money market accounts, while generally having higher rates of interest than many checking accounts, still do not offer particularly high returns on your deposits.

While the interest rates for money market accounts are comparatively more than a checking or savings account, they may not be as high as return rates offered by other types of savings vehicles like a CD, or as high as the potential returns of a traditional investment account.

Choosing a Money Market Account

If you’ve decided that a money market account is right for you, you’ll want to choose the best money market account for your specific situation and goals.

First, it’s important to analyze your risk tolerance and the risk levels presented by potential money market accounts.

While all money market accounts at banks and credit unions are FDIC or NCUA insured up to $250,000 per account holder, some money market accounts may be slightly riskier than others.

The risk factor varies since each bank or credit union will have different investment options.

It is also important to consider how much access you’ll need to your money on a monthly or yearly basis. One hallmark of money market accounts is that they typically only allow a limited number of transactions over a certain period of time.

This may not be a problem if you don’t anticipate needing to make frequent withdrawals from your money market account, but if you think you may need to move money around or frequently access your savings, consider an account with adequate withdrawal restrictions.

Likewise, it is important to watch out for account fees. Money market accounts may come with bank fees and charges, such as maintenance fees or penalties for falling below a minimum account balance.

It’s also important to find a money market account with a minimum account amount that works for you.

Remember, even if a saver has enough money to initially meet the bank or credit union’s minimums, withdrawals that put the account below the minimum balance could be met with unexpected fees.

When searching for a money market account, savers should make sure that account minimums align with your savings goals.

Finally, make sure that you check out the interest rates of any money market accounts you’re considering.

It’s always a good idea to compare interest rates to make sure they meet your expectations and are worth the more restrictive settings of a money market account as compared to a checking account.

Alternatives to Money Market Accounts

Of course, a money market account isn’t the only place to stash your savings. If you’re looking for a smart way to store extra cash, you might have other options.

For example, if you are interested in putting your money somewhere that is easily accessible you might choose a regular checking account, an interest-bearing savings account, or a money management account.

Investment accounts are another option for savings. Investment portfolios, which are not FDIC-insured, allow you to invest money into stocks, ETFs, and even buying and selling cryptocurrency.

Investing may offer higher returns than money market accounts, but investments also always have the risk of depreciation based on market changes.

While savings accounts can help you store cash and earn some interest in return, investing involves putting your cash at risk in return for possibly earning larger returns over time.

While investment accounts might seem like something only your parents and their bosses need, an investment portfolio could be a smart addition to your financial plan. And these days you can manage investments from your smartphone.

For a slightly more structured account, consumers may choose a regular or interest-bearing savings account. Some savings account interest rates rival money market accounts and may offer easier access to your money.

For a savings mechanism with even more structure than a money market account, certificates of deposit, or CDs may offer even better interest rates than money market accounts and saving accounts.

The downside to CDs is that they limit your access to money for months or years and may not be the best option for those who need access to their savings regularly.

Money market accounts can be one tool in a well-equipped financial wellness toolbox, but money market accounts are not right for everyone, and some people may want to use both a money market account alongside other savings mechanisms.

For an alternative option to store your money, check out SoFi Checking and Savings. SoFi Checking and Savings is a checking and savings account that has no account fees and earns you cash back when you spend and save.

Get started with SoFi Checking and Savings and see how you can earn up to 3.75% APY.

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