Money Market Accounts
February 3, 2023
What is a Money Market Account?
A money market account (MMA) is an interest-bearing account at a bank or credit union that combines many of the advantages of other savings and checking products. For example, most money market accounts pay a higher interest rate than standard savings accounts and offer features associated with checking accounts, such as debit card access and check-writing privileges. However, MMAs differ from savings and checking accounts because account holders are limited to a certain number of monthly transactions – typically six, and there is usually a minimum daily balance required to avoid service fees. Additionally, money market rates are variable, and usually rates are tiered based on the balance.
When a money market account is opened at a bank, the Federal Deposit Insurance Corporation (FDIC) insures funds up to $250,000 per depositor, per account ownership type. For example, if you have a checking account with $25,000 and a money market account with $225,000, the entire $250,000 would be insured if it is the only money you have deposited at that specific bank.
History of Money Market Accounts
Money market mutual funds were introduced in the 1970s and sold by brokerages and mutual fund companies. These institutions could pay higher interest rates than banks because the federal government limited the amount of interest banks could offer on savings accounts. To compete with brokerages and mutual fund companies during that time, banks would give away small incentives such as toasters and waffle irons.
Congress passed the Garn-St. Germain Depository Institutions Act in 1982, which allowed banks and credit unions to provide money market accounts at a “money market” rate. As a result, banks could offer more competitive interest rates on deposit accounts backed by the security of FDIC insurance.
How Do Money Markets Differ from Other Deposit Accounts?
Money market accounts are ideal for individuals with short-term savings goals, as they typically pay higher interest rates than regular savings accounts and allow for greater freedom than certificates of deposit (CDs). On the other hand, CDs are more advantageous for individuals with long-term savings goals. While they may offer less access to funds, they offer higher interest rates than regular savings accounts and MMAs.
Below is a breakdown of how money market accounts compare to savings accounts, checking accounts, CDs, and mutual funds:
- Interest is variable on all except CDs. However, most checking accounts do not pay interest
- All accounts are federally insured except mutual funds
- Checks are typically unlimited with checking accounts; MMAs and mutual funds offer limited check service; and most savings accounts and CDs do not offer checks
- Debit cards are usually available with MMAs and checking accounts; mutual funds vary; and most savings accounts and CDs do not offer debit cards
What are the Pros and Cons of Money Market Accounts?
The pros associated with money market accounts include:
- Higher interest rates than regular savings accounts
- Check-writing privileges
- Debit card usage
- FDIC coverage
The cons of MMAs include:
- Typically limited to 6 transactions per statement cycle
- Fees apply if you exceed the number of transactions allowed per statement cycle
- A minimum balance of $1,000 is usually required
The best account option is the one that most closely aligns with your current and long-term financial goals. A money market is a great choice if you are looking for better rates and more flexibility than a regular savings account without the commitment associated with a CD.