What is a money market account and how does it work?

What is a money market account and how does it work?

A money market account is a type of savings account offered by a bank or a credit union with a high interest rate and limited features for transactions, for instance the use of a debit card and the ability to write personal checks from the account. Simply put, money market accounts are something like a cross between a savings account and checking account. They usually have a significantly better interest rate then your traditional savings account but have fewer options for day-to-day transactions than a checking account. Money market accounts are an effective option for building emergency savings that can be accessed quickly. There is a broad range of features associated with money market accounts, so shopping around is essential to find the one that will work for your situation. 

Money market accounts are also sometimes known as money market deposit accounts. 

How does the interest work in a money market account? How do money market accounts earn interest?

The interest rate in a money market account is represented as an APY (or annual percentage yield). It is usually calculated based on average daily balances but is deposited to the account monthly. 

Example of how interest is earned in a money market account: If your money market account had an interest rate of 3.65% and you had an average of $10,000 in the account throughout the month of April, you would accrue interest at the rate of 0.01% every day (3.65% ÷ 365 days) through the month of April. At the end of the monthly statement period, the bank would put $30 dollars in your account all at once as accrued interest.

Note that the APY is higher than the interest rate because interest accrued during the year is compounded, meaning that future interest is calculated on the principal and the interest earned up to that point. 

What are the characteristics of money market accounts? 

Money market accounts can come in many different sizes with different features targeted to different deposit amounts. No two money market accounts are the same in terms of whether they charge fees and what kind of features they provide. It’s important to know all of the features that a money market account could provide to identify the money market account that would be best for you in your circumstance.

Is there a minimum initial deposit needed to open a money market account?

There is no normal set initial minimum deposit for a money market account. Some banks will allow you to open a money market account with no deposit. Others will require $500 or $2,500. High-end money market accounts often require $10,000. What is interesting about the vast range in the requirements for an initial deposit is that there isn’t always a correlation between a higher balance and more features to the account. Also, a minimum initial deposit is not the same thing as the minimum required balance. That means money can be started in an account but that initial balance does not need to be maintained.

Is there a minimum balance needed in a money market account for earning interest?

Some money market accounts will require a certain minimum balance in order to earn interest. That means having less than the required minimum balance will result in earning no interest. But not all money and market accounts are like that. Some banks require a high minimum balance and others require no minimum balance at all.

What is a minimum balance in a money market account for avoiding maintenance fees?

Most banks charge a monthly maintenance charge to their money market accounts, but almost all of those that charge a maintenance fee provide a minimum balance requirement in order to waive the fee. Once again, there is a vast range of money market accounts when it comes to the minimum balance needed to avoid a maintenance fee. Some money market accounts are targeted towards higher balance amounts and might have a minimum balance of $25,000. Still others will allow you to avoid a maintenance fee by maintaining a balance of $500. There are other money market accounts that have no maintenance fee at all and therefore no minimum required balance to avoid a fee.

What are APY or annual percentage yields in money market accounts?

The annual percentage yield, or APY for short, on a money market account is the amount of interest income you can expect to see on a balance over the course of a year. The annual percentage yield will always be a little bit higher than the interest rate because the interest is compounded over the course of the year. That means that interest previously earned is part of the amount used to calculate future interest.

Money market accounts have APY tiers or balance tiers

A very common practice is for a money market account to have APY tiers or balance tiers. These are different balance thresholds at which different interest rates are earned. 

There is a lot of variety to how many tiers as well as the interest earned from the different tiers. Some money market accounts may have as many as six different balance tiers with a graduating interest rate increasing as more money is kept in the account. But that isn’t always the case. Some banks have tiers that work the opposite, meaning once you’ve reached a certain threshold the interest earned on additional money is negligible. 

Usually, the way the tiers work is that if the first tier is up to $2,000 you will earn a certain interest rate for $2,000 and if the second tier is up to $10,000 you earn a different interest rate on the amount of money you have between $2001 and $10,000. 

If you think you are going to have fluctuating balances in your money market account or if you know exactly the amount of money you want to keep in your money market account it is really important for you to understand a bank’s tiers, otherwise you are unlikely to find the money market account that would be best for you. 

Is money safe in a money market account? Are money market accounts safe?

Money market accounts are a very safe place to store your savings because they are protected under federally insured deposits. That means a money market account is insured by the federal government as long as the bank or credit union is part of a national insurance program (FDIC for banks and NCUA for credit unions). Balances are guaranteed to $250,000 for individual accounts and up to $500,000 for joint accounts.

Can you use a debit card with a money market account?

Most, but not all, money market accounts offer a debit card with the account that gives convenient access to the funds.

Can you access funds in a money market account from an ATM machine?

Many money market accounts have access to a network of ATMs where people can draw from their account. The banks or credit unions that offer ATM access may charge you a fee if you use an ATM outside of their network. 

It is very uncommon for money market accounts to have the ability to deposit into the account using an ATM.

Do money market accounts have personal checks?

One of the unique features of a money market account is the ability to write a personal check directly from the account. This can be extremely convenient for people who are making a large purchase from savings. Even with banks or credit unions that have money market accounts that allow for writing checks, there may be restrictions on the number of checks that can be written in a calendar month. Money market accounts are not traditionally designed for daily financial use which is what checking accounts are designed for.

Do money market accounts have overdraft protection?

Some money market accounts will offer the option to have overdraft protection. Overdraft protection will come with a fee associated anytime the account is overdrafted.

Do money market accounts have transaction limits?

Money market accounts are not meant to be used for daily financial transactions, but can be a very convenient way to access the money on a periodic basis. Many banks and Credit Unions will charge a fee if more than a set number of transactions are conducted in the money market account in a given calendar month. 

The most common transaction limit is six transactions. After the limit has been reached an excess transaction fee may be charged in order to execute subsequent transactions before the month is up. 

Recent federal regulations have removed the restriction prohibiting access above transaction limits but that may not prevent a bank or credit union charging for exceeding the transaction limit.

What are the common fees in money market accounts?

There are several different fees common to money market accounts, but not all money market accounts have these fees. Some money market accounts boast about having no fees.

• Monthly maintenance fees: For the banks or credit unions who charge a monthly maintenance fee on money market accounts, the most common amount is between $10 and $15. In most cases, when an account has a fee, it can usually be avoided by maintaining a minimum balance. The minimum balance depends on the institution and can be quite low or very high.
• Excess withdrawal fees: Some money market accounts may have limits to the number of withdrawals that can be taken in a month or the maximum amount of money that can be withdrawn from a money market account in a month. If that limit is exceeded, a fee may be charged, but not all institutions have an excess withdrawal fee. An excess withdrawal fee might also be called a transfer fee by some institutions. 
• Inactive account fee: If an account has no activity–either deposits or withdrawals–in an extended period of time (usually about a year), the bank or credit union may charge the money market account with an inactive account fee. The reason they do this is because inactive accounts trigger regulatory requirements which can cost the institution time and effort. They would rather ensure that an account remains active and open. 
• Paper statement fee: Institutions would like to encourage digital statements as it saves them money and they can better control access to an account’s sensitive information. For that reason, some money market accounts will charge customers who would like a paper statement printed.
• Stop payment fee: Much like a checking account, if a customer would like to stop payment on a transaction in a money market account, the institution may charge a fee.
• Returned deposit fee: If there are insufficient funds to honor a check, debit card charge, or ACH transfer, a money market account may charge the customer a fee. 
• Wire fees: As is common in other types of bank accounts, money market accounts may charge for sending or receiving domestic or international wires.

Do I have enough saved to use a money market account?

Whether you have enough saved up to consider putting the money into a money market account will depend more on the money market account than your savings balance. Money market accounts can have wildly differing balance requirements. There are some money market accounts that do not have minimum balances. Others may require $10,000, $25,000, or even $100,000. 

Can I use direct deposit for my money market account?

You can set up direct deposit for a money market account as easily as you would for savings or checking account. The downsides of setting up direct deposit on a money market account is that there is usually a transaction limit to these accounts because they are not designed for daily financial transactions. If you use the money from direct deposit to cover monthly bills and daily expenses, it may be unwise to deposit the money straight into the money market account.

Can you write checks from a money market account?

One of the unique features to a money market account is the ability to write a personal check against the balances. Money market accounts may be the only savings account that will allow you to write personal checks. However, almost all money market accounts have limits to the number of transactions in a month, so money market accounts are best used for infrequent transactions, rather than monthly bills. 

Are there minimum required balances to money market accounts?

There are four types of minimum balances associated with money market accounts:

1. Minimum initial deposits which is the amount needed to open an account
2. Minimum balance required to earn interest which is the amount needed to earn any interest in the account
3. Minimum balance required to avoid the monthly maintenance fee
4. Minimum required average daily balance

Not all money market accounts have minimum requirements and the ones that do are unlikely to have requirements for all four types of minimum balances. 

What are the advantages of money market accounts?

There are five key advantages to using a money market account:

• Higher interest rates: Money market accounts offer better rates than you can get in a traditional savings account.
• Personal checks: Money market accounts offer the convenience of writing a personal check from the account. If you’ve been storing money in a money market account for a major purchase, being able to write a check for the purchase can make things really easy. 
• Debit card: Unlike a traditional savings account, money market accounts often provide a debit card for easy access to the money. 
• Safe place to store savings: If issued by a participating bank or credit union, money market accounts are insured by either the FDIC or the NCUA for up to $250,000 on individual accounts or up to $500,000 for joint accounts. This protects the deposits from the possibility of bank failure.
• Flexibility: Money market accounts are a good balance of a savings account and the convenience of a checking account. They are also much more flexible than certificates of deposit.

What are the disadvantages of money market accounts?

There are a handful of disadvantages of money market accounts?

• Limited transactions: Money market accounts usually have a limit to the number of transactions you can conduct in the account in a calendar month. If you think you will need to move funds in and out more than 6 times in a calendar month, a money market account may not be your best option. 
• Fees: You should pay close attention to the kinds of fees a money market account will charge. Not all of them charge fees and the ones that do might not charge the fees you are most in danger of incurring. 
• Minimum balance requirements: Most money market accounts have minimum balance requirements. If you find the balances in your savings fluctuate a lot, you could fail to earn interest or get hit with monthly maintenance fees.
• Not enough friction to prevent spending savings: If the money market account is where you store your longer-term savings, rainy day fund, and emergency funds, you might find that it is too easy to access that money. With the ability to write personal checks from the account and use a debit or ATM card to access the funds might be a temptation to spend those funds in ways you didn’t intend. 

What are good alternatives to money market accounts?

The most popular alternatives to money market accounts are high yield savings accounts because they offer flexibility and the ability to earn higher interest rates. High yield savings accounts do not offer debit cards, so they are not as flexible as a money market account. 

What are three alternatives to money market accounts?

1. High yield savings account
2. Certificate of deposits
3. Traditional savings account

What is the difference between the interest rate and the annual percentage yield (APY) in money market accounts?

When it comes to money market accounts, the interest rate is the rate at which you earn interest on balances. The annual percentage yield (APY) is the percentage increase you can expect over the course of the year. APY is always higher than the interest rate is because interest compounds, which means you are earning interest on the money you’ve made in interest. Therefore, the overall yield will be higher than your interest rate. 

Is a money market account and a money market fund (aka money market mutual funds) the same thing?

Money market accounts and money market funds are very different things. Money market accounts are a type of savings account where you earn a higher interest rate than you would on a traditional savings account. A money market fund is a type of investment which delivers a fixed income by investing in safe, short-term debt securities.

When should I use a money market account?

Money market accounts are a hybrid between a savings account and a checking account. They are best used when you are building or maintaining a savings that you would like to have access to. The following are situations in which you might consider using a money market account:

• Emergency funds: Building an emergency fund that you can access when you need to is an ideal use for a money market account.
• Saving for a large purchase: As you are amassing the savings needed for a big purchase–like a home, car, boat, or small business–a money market account is a great way to earn a little extra interest while still keeping the money safe and liquid. 
• Long term savings: Some advisors suggest that you should have the equivalent of three months salary saved up for emergencies. A money market account is a great place to save that money: it’s ready when you need it, but earning a little extra money when you don’t.
• Retirement funds: If you are nearing retirement and don’t want to risk your funds to the stock market, money market accounts could be a good place to keep some of your retirement funds. 

How safe are money market accounts?

Money market accounts are extremely safe places so long as your money market account is with a federally-insured institution. Money market accounts are considered savings accounts. If your money market account is with a bank that is a member of the FDIC or a credit union that is a member of the NCUA, your deposits are insured up to $250,000. If you have a joint account with two names on the account, the account will be insured for up to $500,000.

Are there limits on money market transactions? 

Money market accounts usually have limits to the number of free transactions that can be conducted from the account. Most money market accounts limit the number of transactions in a month to six. But federal regulation in 2020 removed the hard limit. That means you can do more than the six transactions, but you might need to pay an excess transaction fee, which can be as much as $35. 

Can I withdraw all my money from a money market account? How much can you withdraw from a money market account?

It is very uncommon for a money market account to restrict the amount of money you can withdraw. One of the key benefits of a money market account is the ability to access the funds whenever you want.

What is the difference between a money market account and a certificate of deposit (CD)?

Money market accounts are flexible accounts that act like a savings account but have a few features more common to checking accounts. From money market accounts, you can charge things using a debit card or write personal checks. A certificate of deposit is a saving product that offers a better interest rate than a traditional savings account but restricts how you can use the money. The APY is a fixed rate for a specified term. You are committed to keeping your money in the CD during the length of the term. The bank penalizes you if you remove the funds before the CD matures.  

What is the difference between a money market account and a high-yield savings account?

On the surface, there often doesn’t appear to be a significant difference between a money market account and a high-yield savings account. They both boast much higher interest payout than a traditional savings account and they both have some restrictions on the number of transactions you can execute in a month. 

Is a money market account the best way to build savings?

A money market account can be a great tool in your effort to build up your savings. It can be a good place to build an emergency fund, large purchase fund, and a rainy day fund. In all of those circumstances, you don’t need to access the account on a regular basis but could benefit from having the funds readily accessible through a debit card (in the case of paying for an auto repair) or through writing a check (in the case of making a big purchase). Check out our information on how to save money.