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 a money market account, a type of deposit account offered by banks and credit unions.
Money market accounts might pay higher interest rates than a traditional checking or savings account. However, 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 deposit account that has unique features.
Many money market accounts pay higher interest rates than a traditional savings account. However, money market accounts may be more restrictive than a traditional checking account, often only allowing a certain number of withdrawals each month using checks or a debit card.
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.
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Pros of a Money Market Account
There are many pros to using a money market account, and many people find them a useful addition to their financial planning strategies.
Higher Interest Rate
Perhaps the most enticing part of a money market account is locking in an interest rate that’s higher than that of a standard checking account.
According to the FDIC, as of February 2023, the average national interest rate for checking accounts was 0.06%, while for a savings account, it was 0.35%. Money market accounts, on the other hand, had an average interest rate of 0.48%.
Freedom of Access to Cash
Of course, some other types of deposit accounts, like CDs, also offer higher interest rates than a standard checking or savings account. However, a money market account may offer more flexibility than a CD.
CDs generally 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 better option. Most money market accounts offer a limited number of transactions per month, which means 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’s not possible with other types of investment accounts, where there’s always the risk that your principal could be partially or wholly lost due to market changes.
Cons of a Money Market Account
There are also downsides to using a money market account, 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. You might be less tempted by a more restrictive type of account, like a CD.
Minimum Balance Requirements
Additionally, money market accounts may require minimum balances that can 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, which can allow you to sidestep the high minimum balances a money market account might have.
Better Earning Accounts
One final con is that money market accounts, while generally having higher interest rates than many checking accounts, still don’t offer particularly high returns on your deposits.
While the interest rates for money market accounts are comparatively higher than those of a checking or savings account, they may not be as high as return rates offered by other types of savings vehicles, like a CD. Potential returns also might not be as high with 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.
Consider the risk involved. 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.
Know how much access you’ll need. It’s 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.
Watch out for account fees. Likewise, it’s 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.
Note minimum balance requirements. 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 account minimums align with their savings goals.
Compare interest rates. 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’re interested in putting your money somewhere that’s easily accessible, you might choose a regular checking account, an interest-bearing savings account, or a money management account. In fact, some savings account interest rates rival money market accounts and may offer easier access to your money.
Meanwhile, CDs may offer even better rates than money market and savings accounts. However, they limit your access to money for months or even years, which means they may not be the best option for those who need regular access to their savings.
Investment accounts are another option for savings. 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.
Investment portfolios, which are not FDIC-insured, allow you to invest money in stocks and exchange-traded funds (ETFs), among other investment types. Investing may offer higher returns than money market accounts, but there’s also the risk of depreciation based on market changes.
Money market accounts can be one tool in a well-equipped financial wellness toolbox, allowing you to save at a potentially higher interest rate while maintaining access to your money. Still, some people may want to use a money market account alongside other savings mechanisms, or they may prefer an alternative, such as a CD or an investment portfolio.
It’s 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 used through an investment fund company. It is not FDIC-protected.
One easy way to tell the difference between a money market account and a money market fund is based on whether 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, your principal could possibly be lost or reduced depending on market performance.
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