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What is a money market account? It’s a type of savings account. Like other savings accounts, it allows you to deposit money into the account and then earn interest. It differs from other savings vehicles, though, in that the interest rate you earn fluctuates — usually daily — depending on money market performance.
So why choose it over a traditional savings account, or even a high-yield savings account?
In a stable market environment, money market accounts can usually offer higher interest rates (meaning higher earnings for you) than savings accounts. But when markets perform poorly — like they are right now thanks to the pandemic — the rate of return suffers.
Right now, a money market account might not offer you much benefit over other savings vehicles, but it’s still worth considering. At the end of the day, you need a safe place to store your savings, whether it’s a high-yield savings account or a money market account.
If this year has taught us anything, it’s that life is uncertain. “When we think about your overall financial plan, having a cash buffer of some kind is extremely important,” says Matthew Shiney, a financial advisor at Edward Jones, an investment firm based in Saint Louis.
With unemployment rates at a record-breaking high, we’re all seeing the importance of having money in savings to call on when life throws a wrench your way. Is a money market account the right place to keep your savings? Let’s take a look.
Traditional Savings vs. High-Yield Savings vs. Money Market Account
Financial institutions want your money. When you deposit cash into a savings account, it usually doesn’t just sit there. Instead, the financial institution uses your money, loaning it out to other people. But don’t worry. They have to keep reserves on hand to process any withdrawal you request (subject to withdrawal limits).
The real difference between a savings account — both traditional and high-yield — and a money market account is how the money you deposit gets used. With a money market account, it gets invested in money markets or short-term loans. Because the loans mature quickly, the financial institution recoups its money quickly. The money it makes in a relatively brief window depends on the current interest rate it can charge for short-term lending.
When the economy’s doing well, there’s usually a decent rate. To incentivize you to put your savings into a money market account so they can use it in this way, financial institutions pass some of the money onto you in the form of a higher interest rate.
At least, that’s the case when markets are performing. As Shiney explains, “money market accounts are more responsive to the overall interest rate environment. So when interest rates go up, their rates tend to go up along with them. But as we’ve seen over the last four months, when interest rates go down, money market account rates go right along with them.”
Money market accounts are a place to store your savings with potentially high-interest rates, but the rates fluctuate regularly depending on market performance. Be mindful of account fees, too.
MMA interest rates are so low right now they’re pretty similar to those offered by high-yield savings accounts. Kolton Kyne, an associate financial advisor with Ameriprise Financial, a financial planning firm based in Minneapolis, says no matter which you choose, “it’s a cash reserve, so your goal is capital preservation.” This means making sure the money you save keeps up with inflation, whether you’re depositing it there as an emergency fund or working toward a long- or short-term money goal. Interest rates are one of the biggest ways to keep up with inflation.
Money market accounts, like savings accounts, usually let you make up to six transactions (including using a debit card or check attached to the account) a month.
That can be great if you need a little liquidity, but can also tempt you to dip into your cash reserve.
Advantages and Disadvantages of Money Market Accounts
Money market accounts offer one distinct benefit, says Kyne: “a higher rate of interest than a savings account.” He adds, “anytime you’re getting a higher potential return on your investment, you take a little bit more risk.”
What are those risks? Let’s take a look at some of the biggest money market account advantages and disadvantages.
|High APYs when markets are performing well||Low APYs when markets are performing poorly (as is the case right now)|
|Liquidity, i.e., the ability to use the money in your account for a set number of transactions each month||You’re subject to a limit of six transactions per month|
|Usually, deposits up to $250,000 are insured by the FDIC *||Some money market accounts require a sizeable deposit to open the account and have minimum balance requirements, too|
When to Use a Money Market Account
“It’s a weird time for interest rates because everything is so low right now,” says Kyne.
In our low-rate environment, why are people choosing a money market account? Even when these accounts can’t offer much in the way of returns beyond what you’d get with a high-yield savings account, many people like them because they serve as a sort of hybridized checking and savings account.
With a money market account, you get a decently competitive interest rate, even in uncertain times like these. Plus, you can use the money in your account for up to six transactions a month. You can also write checks and use a debit card. You could use your money market account to pay rent or your car loan, for example.
Why the six-per-month limit? Regulation D is set out by the Federal Reserve Board meant to protect financial institutions’ reserves.
If you plan to withdraw from your money market account, be mindful. Going over the six transaction limit will usually land you with a fee, and doing so repeatedly can force the institution to close your account.
Also, many money market accounts come with minimum account balance requirements. If you withdraw money and dip below the required balance, you’re looking at a fee there, too.
A money market account could be an excellent place to keep your cash reserves with some liquidity options. But these accounts also usually come with specific fees. If you’re wondering if a money market account is right for you, make sure you could maintain the minimum account balance.
Alternatives to Money Market Accounts
CDs vs. MMA
You can buy a certificate of deposit (CD) from many financial institutions. You buy it for a set amount of money, giving the institution the funds for a set period of time (e.g., one year, five years). The longer you let the institution keep your money, the higher the APY they’ll offer you for the CD. Once the CD matures, you get your money back — plus interest. CDs might offer slightly higher interest rates than money market accounts, but your money is stuck until your CD matures. If there’s any chance you’ll need those funds, it’s best to stick with a different savings option.
High-Yield Savings Account vs. MMA
We’ve already talked about high-yield savings accounts a bit. Right now, their rates are comparable to those of money market accounts. With a high-yield savings account, you can’t write checks or use a debit card like you can with a money market account, but you usually get a fixed interest rate, and you may be able to open an account with a lower balance, too. It’s definitely worth comparing these two options if you’re thinking about opening an account to store your savings.
Treasury Savings Bonds vs. MMA
Treasury bonds are basically like long-term CDs. But instead of buying them from a financial institution, you’re buying them from the federal government. Treasury savings bonds take at least ten years to mature. They can offer you a very safe way to earn interest on your money, but they’re best used when you can keep your money tied up for a decade or more. On the other hand, a money market account might offer you a comparable interest rate, but you can use your money at any time.
Traditional Savings Accounts vs. MMA
Traditional savings accounts will usually offer you lower interest rates and more liquidity than money market accounts. Traditional saving accounts are typically tied to your checking account, where you have the ability to move funds between them within minutes.
Investment Stocks vs. MMA
If you’re looking to aggressively grow your money, money market accounts aren’t delivering right now because of their low interest rates. Stocks could offer a much larger payoff, but they’re also a much riskier investment. That’s why you should prioritize saving a sufficient emergency fund in a more stable account before you begin to invest in the stock market.
Is a Money Market Account Right For Me?
If you have any savings or plan to start saving, and you don’t earn at least 1% APY on that money, start shopping for a better rate now. Unless this money is set aside for an upcoming purchase, there is zero reason not to boost your earnings.
Storing your savings in a traditional savings account with minimal interest is throwing away the potential for free money you could earn through interest elsewhere. Let your money work for you and park it in a high-yield account until you need it. It will earn high-interest rates with minimal risk and relatively quick access to your money.
Choosing right now between an MMA and a high-yield savings account, we recommend the high-yield account. You get comparable interest rates without the fees and minimum balance requirements. If you are working on your emergency fund or only have a few hundred dollars saved up, the high-yield account is your best option.
Whether you choose a high-yield savings or a money market account, you’ll be able to rest easy knowing your savings are safe and growing.