Maybe you already have a certificate of deposit (CD) or two on top of your traditional checking and savings account. If so, you may be thinking, “I’m all set. Why would I need a money market account on top of these?” You may also be thinking you don’t want one more thing to keep track of. (We understand.)
So, what is a money market account and how does it work, anyway?
To a certain extent, you can think of a money market account as a hybrid between a checking and savings account. Money market accounts function a lot like a savings account with limited checking account privileges. You’ll typically earn a variable rate of interest, as well.
You may not gravitate toward a money market account, especially if you’re comfortable with where you’ve settled your money up until now. But it could be a useful tool to handle your money.
Let’s find out when a money market account could be the right place to park some money.
Pros and cons of money market accounts
One of the best ways to the think through whether a particular account is right for you (or any life decision, for that matter) is putting together a pros and cons list. Let’s look through the pros and cons of money market accounts so you can determine if they have a place in your financial picture.
- Potentially higher interest rates: Compared to a savings account or checking account, money market accounts can often offer slightly higher interest rates. The average money market interest rate is 0.07% APY, according to the Federal Deposit Interest Corporation (FDIC).
- Check writing options: Unlike a traditional savings account, you can use a money market account to write checks.
- Debit card options: You may also get a debit card with a money market account, which can be an additional perk over a typical savings account.
- Minimum balance requirement: Some banks often require a minimum deposit to open a money market account. You might face a higher minimum balance requirement than your average checking or savings account.
- Potential fees: Some money market accounts carry a monthly fee or charge fees for withdrawing money from non-affiliated ATMs, check writing, excessive withdrawals or not maintaining a minimum balance. Fees will vary across different banks, so always compare costs when shopping for a money market account and compare potential fees carefully.
- Limited transaction options: Some financial institutions limit your transaction options, though federal requirements now allow financial institutions to decide whether they apply any withdrawal limits. This means instead of being limited to six savings or money market transfers or withdrawals per month, customers can make more or unlimited transfers or withdrawals, depending on the financial institution.
How does a money market account work?
First, you want to search around banks and other institutions for a money market account that suits your specific needs. Once you do that, take a look at the next steps — and don’t worry, they really don’t take long to implement:
Step 1: Choose the right money market account.
Once you identify that a money market account is right for you, you’ll need to choose an institution and an account. Learn about the fees, minimum balance requirements and the other rules that affect you, such as:
- Annual percentage yield (APY): Annual percentage yield shows you how much you’ll earn on your savings in terms of interest. The higher your APY, the more you’ll earn in return.
- Withdrawal methods: How can you withdraw money from your money market account? Can you access money by ATM, debit card and/or check? Check on ATM access and other withdrawal methods.
Step 2: Apply for an account.
It’s likely a simple process to open an account if you already belong to a particular financial institution. Otherwise, you’ll need to submit an application over the phone, online or at a local branch. You’ll need to provide your personal information: name, birthdate, taxpayer ID or Social Security number, address and employer/income. You may also need to supply information about any joint owners and beneficiaries.
Step 3: Fund your new account and use it.
Finally, set up an initial deposit to meet the money market fund requirement. Don’t forget to request checks or a debit card if you plan on using those features. Your new money market account could earn a higher interest rate compared to a checking or savings account. (That’s the fun part!)
Difference between a money market account vs. other bank accounts
What’s the difference between savings accounts, certificates of deposit (CDs), money market accounts and checking accounts? Let’s take a look at a comparison chart between all four options.
|Money Market Account||Savings Accounts||Checking Accounts||CDs|
|Insurance||Bank money market accounts: insured by the Federal Deposit Insurance Corporation (FDIC) (up to the maximum allowed by law)||Bank savings accounts: insured by the FDIC; credit union savings accounts: insured by the NCUA||Bank checking accounts: insured by the FDIC; credit union checking accounts: insured by the NCUA||Insured by either the FDIC or NCUA, depending on where you keep the account|
|Average Interest Rate||0.08%, according to data from the FDIC||0.06%, according to data from the FDIC||0.03%, according to data from the FDIC||Varies, though a three-month CD returns approximately 0.06% and a 60-month CD returns 0.28%|
|Withdrawal Restrictions||Financial institutions may place limits on how many withdrawals you can make during a single statement period.||May face withdrawal limits||N/A||May face withdrawal limits|
|Minimum Balance Requirements||Varies, depending on the financial institution||Varies||Varies||Varies|
|Check Availability/Checks per Month||Limited number of checks per month||No checkwriting capabilities||Varies, but possible unlimited checkwriting availability||N/A|
|Access to Funds||Checks, debit card access, ATM, local bank branch access||ATM, local bank branch access, bank and ACH transfers||Access through debit cards, local bank branch visits, ATM cards, ATM transfers and wire transfers||Local bank branch access, bank and ACH transfers|
Are money market accounts safe?
Now that you know the answer to “What is a money market account?” you may wonder whether money market accounts are safe. (It’s a great question!)
Money market accounts are generally considered safe instruments; banks use money to invest in liquid, stable, low-risk securities. Money market accounts are insured by the FDIC or the NCUA. Keep in mind, money market accounts are not the same thing as money market funds, which are offered by investment companies and are not FDIC or NCUA insured.
If you want a safe investment option insured by a federal entity with checkwriting and debit card capabilities, a money market account might be a great option for you.
How do I choose the best money market account?
Shop around for the best money market account for your needs and get convenient access to your money. Ally Bank’s Money Market Account offers a competitive rate along with some other perks, including the following:
- Unlimited ATM withdrawals for free at 43,000+ Allpoint® ATMs
- Reimburse up to $10 per statement cycle for fees charged at other ATMs nationwide
- No monthly maintenance fees
- No minimum balance requirements
- No overdraft fees
- Can open and fund your account with any amount
- Free standard checks and debit card
How do I know if a money market account is right for me?
If you want a savings account with the flexibility of a checking account (and potentially earn a slightly higher interest rate), you may consider a money market account. Check writing, having access to another source of money or using a debit card can give you flexibility whether you want to build an emergency fund or save for a vacation.