Tired of getting almost nothing back for the money you’re loaning your bank in a regular savings account? Because that’s basically what a savings account is. It’s an agreement where the bank gives you a safe place to park your savings in exchange for the chance to invest those funds for themselves.
The trouble is that they may be earning far more on your money than you’re earning yourself! One thing’s for sure—the bank is putting those savings to work for themselves. So if you’d like to have more to show for your money and a few other perks, you might want to look into a money market account.
What Is a Money Market Account?
A money market account (MMA) is somewhere you can save money and maybe get a better interest rate than you’d see with a regular savings account. You can also use an MMA to pay for things with checks or a debit card. That’s the good news. The bad news is, the number of monthly transactions is limited by your bank or credit union. Plus, there’s a higher minimum balance compared to typical accounts.
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The main point here is the opportunity to earn more interest on your money. Earning more on your cash is always smart. Here’s what we mean. To really win with money, you’re gonna need to impose your will upon it. Settling for less—which is what many of us are used to doing with our money—isn’t going to help you succeed. Shopping for an MMA that gets you more cash in your pocket is one small way you can win more (and more often).
But markets vary, and making more with an MMA is no guarantee. If you find that the interest rates for regular savings vs. MMA are the same or close, you’d be better off using a normal savings account and avoiding the higher minimum balance requirement.
How Does a Money Market Account Work?
When you open a money market account, you’re agreeing to let your bank (or credit union) use your deposits to buy short-term debt investments. In exchange, you get to earn interest on those savings. What about accessing your funds? An MMA works a lot like a checking account. You can:
- Write checks
- Use a debit card
- Make withdrawals
But keep in mind that an MMA will typically have a defined number of monthly transactions. The legal limit is six transactions per month, and some banks will set this even lower. Think big purchases and emergency funds, rather than grocery trips and beer runs.
Here’s our favorite thing about MMA life. (No, not the jab and double-leg takedown combo—that’s the other kind of MMA.) Money market accounts are safe! Because your bank’s money market investments are usually set on a very short term, MMAs are very low risk for you. At the same time, that little bit of risk pays off in the form of better-than-average return on investment (ROI).
That mix of low risk and decent ROI is why MMAs have become a popular place to park emergency funds or to save up for larger purchases. They are slightly riskier than a savings account but they can also get you a bigger yield over time.
What’s the Difference Between Money Market Accounts and Money Market Funds?
Let’s learn about a similar-sounding, but totally different, kind of investment—a money market fund. Money market funds (MMFs) are just mutual funds you can buy through a bank or mutual fund company that are placed in the money market. But while both MMAs and MMFs are invested in the same place, there are a couple of key differences:
- Deposits in MMAs are insured for up to $250,000 in your bank (by the Federal Deposit Insurance Corporation) or credit union (by the National Credit Union Shared Insurance Fund). So no matter what happens, you’re covered for a cool quarter million.
- The investment (or principal) in an MMF is totally uninsured—even if you bought the shares through a bank. Although dips in the money market are rare, losing some of your savings isn’t fun.
- As part of an effort to provide relief during the coronavirus, Congress has relaxed the old rule that limits MMA withdrawals to six times monthly. But the removal is not mandatory, so your bank might still have its own monthly limits.
- Banks are allowed to set their own limits on your monthly transactions from an MMF, and there may be fees for those. Be sure you learn your own bank’s rules before getting one.
We don’t recommend investing in MMFs. Instead, use an MMA to store emergency fund savings and sinking funds for larger purchases. If you’re looking to invest (which should always wait until after you’ve saved up three to six months’ living expenses in an emergency fund), you’re better off putting your money into tax-advantaged retirement accounts.
Benefits of Money Market Accounts
- The chance to earn a higher rate of return than you’d see with a normal savings account
- Knowing your money is safe and insured
- In some MMAs, the convenience of debit card access and check writing
Drawbacks of Money Market Accounts
- Higher-than-normal minimum balance than a savings account.
- Even when you can get a better rate compared to normal savings accounts, the earnings are nothing special. (But then again, investment isn’t the main goal with MMAs. Safety is the goal, and modest gains are a nice bonus if you can get them.)
- Unlike your checking account, an MMA will likely come with limits on monthly transactions. To be sure you’re putting all of your money where it helps the most, make it a habit to fund all of your monthly budget items in your checking account before moving cash to an MMA.
- Be aware that a new interim federal law passed in 2020 allows banks to relax withdrawal limits on both normal savings accounts as well as MMAs.1 But allowing more than six monthly withdrawals is only optional, and your bank may have its own rule around transactions. Keep that in mind as you consider MMAs!
How Do MMAs Compare With Other Accounts?
Don’t let the bank account options scare you! Each one has its own advantages, and the differences are worth understanding.
MMAs Compared to Checking Accounts
What both accounts do is allow you to write checks from the balances. How convenient! But don’t let that common feature mislead you. MMA checks aren’t really designed to be used to buy Girl Scout Cookies or to get cash at a grocery store. Since MMAs are mainly used for either emergency savings or sinking funds, you’ll mostly be using these checks to pay the plumber or buy your long-awaited dream car.
MMAs Compared to Savings Accounts
We’ve said it a few times now—MMAs sometimes bring you a better interest rate than their garden-variety cousins known as savings accounts. But that isn’t always true. It’s really up to you to find out what rates are available. (We know you can do it!) From there, you’ll want to know the minimum balance in any MMA before opening it.
For example, let’s imagine your bank is currently offering a 0.75% annual percentage yield (APY) in both kinds of accounts. But they have a $2,500 minimum deposit to open an MMA. (Those are pretty typical numbers you might find.) Since both account types are insured for up to $250,000, there’s no compelling reason to go with an MMA.
But if you had the cash on hand to open an MMA and the bank was offering 1.75% APY, it would be worth it. Why? Because if you saved $250 a month over the course of the year, you’d earn an extra $40 compared to a regular savings account. That’s half a year of Hulu!
MMAs Compared to CDs
MMAs work well as a flexible safekeeper for emergency and sinking funds. And there’s never a penalty to withdraw your money.
What about CDs? No, not compact discs. Something even more obsolete—Certificates of Deposit. We don’t recommend them for any reason. They don’t usually offer much of an interest advantage. On top of that, you have to agree to leave the deposit alone for a set time period. And if you need to get at your money early? You’ll be paying a penalty to the bank. It makes about as much sense as lending your car to a friend and agreeing to let her keep the wheels if you ask for it back!
How Do I Choose a Money Market Account?
Not all money market accounts are created equal. So, what sets a winner apart? Obviously, you’ll want to shop for the best interest rate. But the real deal breaker here is fees. Don’t accept any. You don’t need to because there are plenty of MMAs that don’t charge them.
A money market account will be right for some people or situations. For others it would make no sense. But here’s something we all need: a debit card that fits our spending and saving needs without the fees.
The question is, why is it wrong for you to rob a bank, but okay for a bank to rob you? If you’re tired of paying outrageous charges just to access your own money, there’s a debit card that does it all without those pesky fees. Gazelle is a new banking experience that leaves normal, debt-driven banks far behind. No fees. No debts. Just a chance to tell your money what to do. Sign up to be a beta user today!