When it comes to your money, there are an endless array of things to do with it - whether you opt to invest or put your money somewhere safe in a bank. But with market volatility the way it is, sometimes it's nice to put your money where you know it will earn interest. And a money market account may be just the right vehicle for you.
While savings accounts or certificates of deposit (CDs) have always been a safe option, money market accounts offer some unique benefits that may persuade you to rethink your account (read: higher annual yields).
But, what is a money market account, and how is it different from other accounts? Better still, what benefits do money market accounts offer?
What Is a Money Market Account?
A money market account is akin to a savings and checking account in that it provides a place to put funds in a bank or credit union while earning interest as well as the limited ability to write checks. However, money market accounts generally offer better interest rates and different withdrawal options than savings or checking accounts.
With the ability to write checks and earn a higher annual yield on your funds, money market accounts (MMAs) have become a popular alternative to savings or checking accounts - given that they're essentially something of a mixture of both.
However, because of their higher interest rates, money market accounts generally have a higher minimum amount and often require you maintain a higher balance. Still, they are also similar to checking accounts in that you are given the limited ability to write checks or (sometimes) make withdrawals with debit cards as well.
Money market account portfolios often invest in more liquid, short-term investments. And, as an added bonus, money market accounts are FDIC-insured - so risk is minimal.
Still, what are the pros and cons of a money market account, and are they worth it?
Money Market Account Pros and Cons
No account is perfect - and money market accounts are no exception. However, given that they have taken on somewhat of a "best-of-both-worlds" persona, it is worth researching to see if a money market account would fit your needs.
Because money market accounts are kind of like a mix between a savings account and a checking account, one big plus they've got going for them is the ease of access to your funds.
Money market accounts, much like checking accounts, make accessing your account easy by allowing you to write a certain amount of checks per month, and also allow you to withdraw cash. In fact, some money market accounts even offer debit cards to enable purchases and make withdrawals easier.
However, there are restrictions on how many times you can withdraw or use a card per month (just like with savings accounts).
Con: Withdrawal Limits
By law (according to the Federal Reserve Board via the Reserve Requirements for Depository Institutions Regulation D), you can only withdraw or credit transfer a maximum of six times per month on a money market account - and some banks or credit unions might even cap it at three times per month.
Because of the regulations, money market accounts aren't as easy for daily use as a checking account might be. But, given that you are allowed up to six withdrawals a month, money market accounts are often more flexible than accounts like CDs.
But for those who are able to comfortably meet the account minimums, money market accounts typically have higher interest rates than savings accounts - and they're still FDIC-insured (or NCUSIF-insured for credit unions), which will protect up to $250,000 per account, providing you with a safe investment.
For earnings potential, money market accounts generally earn more the larger your balance is - and can typically earn you rates somewhere between a CD and a savings account. Many money market account APYs are upwards of 2%.
Con: Minimum Balance
Still, for some, having a high minimum balance can be a definite issue - and can even cost you in fees and lower returns.
Most money market accounts have a minimum balance of at least $2,500 (although some have lower minimums, as low as $1). If your account drops below this minimum, you may be subject to fees and other costs that can quickly deteriorate your funds and any added perks that the higher interest rate provided.
As a general guideline, for those with less than $2,500 to spare, a savings account may be a better option given the often lower minimums.
Money Market Account vs. Savings Account
But since both money market accounts and savings accounts give you a vehicle to store money while earning interest, what's the difference?
For one, money market accounts typically have higher interest rates that can earn you more in returns. For example, a savings account may pay 1% interest while a money market account may pay up to 1.5% to 2% interest.
However, because money market accounts generally have higher interest rates, they also (typically) have higher minimums than savings accounts - which might make them less accessible for every investor.
Still, the same withdrawal limits apply to both money market accounts and savings accounts.
Money Market Account vs. CDs
But what's the difference between putting your money in a money market account or a certificate of deposit (CD)?
CDs are what's called time deposits, which generally reach maturity six months to five years, earning interest with their high interest rates.
One of the major differences between a money market account and a CD is their access. CDs don't give you access to withdrawals through checks, ATM transactions or electronic transfers - which could be a big disadvantage to some investors.
Additionally, CDs often have penalties for early withdrawals that may affect your liquidity, making your funds less liquid. But, as a bonus, CD interest rates don't change during the duration of the account, and they're often higher than savings account rates (or money market accounts).
CDs typically have the most competitive rates of any of the accounts - including money market accounts.
Best Money Market Accounts in 2019
There are plenty of good MMA options - but which are the best for annual percentage yields (APY)?
According to NerdWallet, some of the best money market accounts include Capital One's (COF) Capital One 360 Money Market Account, which has an APY of 2.0% with a $10,000 minimum balance. Additionally, Sallie Mae (SLM) currently has a money market account with a 2.20% APY and a $0 minimum balance - with a 2.18% interest rate to boot.
Additionally, State Farm Bank has a money market account with a 2.25% APY and a $0 minimum balance.
Money Market Account Calculator
There are plenty of places to find the best money market account rates. You can find a money market account calculator here, which compares the best savings and money market accounts.
The Bottom Line
With so many account options, it can get complicated figuring out which one is best for your needs.
The most important things to consider when choosing an account - whether that be a money market account, savings account or a CD - is to examine how much money you are able to deposit, what your spending and withdrawal habits are and what kind of interest rate you are hoping to get for your funds.
Additionally, given their structure, money market accounts are especially suited for bigger expenses you may not have as frequently - like an emergency fund or paying tuition.
While there are some drawbacks, money market accounts are usually a good mesh of both a savings and checking account, and can provide you with strong yields and interest rates while having the flexibility to allow you withdrawals.