Money market accounts (MMAs) offer a unique blend of features that may appeal to savers looking for higher interest rates, liquidity and security. However, understanding the full spectrum of advantages and disadvantages associated with these accounts is important when evaluating different savings vehicles. Whether you’re considering a money market account for its higher interest rates, FDIC insurance or the flexibility of check-writing and debit card privileges, it’s important to also consider the drawbacks, including transaction limits, fees and minimum balance requirements.
If you need help deciding how to distribute your assets across different types of accounts, consider speaking with a financial advisor.
What Are Money Market Accounts?
Money market accounts (MMAs) are a type of deposit account that is offered by banks and credit unions, which typically yield higher interest rates than traditional savings accounts.
These financial products, which emerged in the 1980s because of banking deregulation, are designed to provide account holders with the combined benefits of both savings and checking accounts. This means that, like savings accounts, they earn interest over time. They also offer some of the flexibility of checking accounts, such as limited check writing abilities and access to funds via debit cards.
Additionally, MMAs are insured by the Federal Deposit Insurance Corporation (FDIC) up to the legal limit, which is currently $250,000 per depositor, per insured bank, for each account ownership category. This insurance provides a layer of security for individuals looking for a safe place to keep their short-term savings, ensuring that their funds are protected even in the event of a bank failure.
The operational mechanics of money market accounts are like those of savings accounts. However, MMAs often offer more favorable interest rates, which are typically compounded daily and paid out monthly. To benefit from these higher rates, account holders may be required to maintain a higher minimum balance than they would with a regular savings account.
Advantages of Money Market Accounts
If you’re planning for a future vacation or building an emergency fund, a money market account can be particularly advantageous for balancing earning potential and financial security. Here’s a look at five common pros of opening a money market account:
Higher Interest Rates
Money market accounts are distinguished by their competitive interest rates, which surpass those offered by traditional savings accounts. For instance, a $10,000 deposit in an MMA with a 0.5% APY would yield $50 in one year, while same amount in a traditional savings account at 0.06% would only produce $6 in interest. Over time, this difference can compound, making money market accounts an attractive option for those looking to maximize their interest earnings.
The interest rates of money market accounts are subject to various influencing factors, including the broader economic environment. For example, when the Federal Reserve elevates its benchmark interest rate, financial institutions typically respond by raising the rates on money market accounts. Conversely, during economic downturns or when the Federal Reserve lowers its rates, the interest rates on these accounts tend to decrease.
Liquidity
One of the most compelling features of money market accounts is their liquidity. Account holders can readily access their funds without incurring penalties. (However, some financial institutions may place limits on withdrawals and transfers.) This level of accessibility is particularly beneficial for individuals who require frequent access to their funds without the constraints of more restrictive financial vehicles. For example, in an emergency or when saving for a short-term goal like a down payment on a home, the ability to withdraw funds without penalties is invaluable.
For a comparison with other investment options, such as certificates of deposit (CDs) that mandate a fixed term for investment, money market accounts offer superior liquidity. While stocks and mutual funds are also liquid, they carry a higher degree of volatility, which may not be suitable for those who need immediate access to their funds without the potential for loss. Therefore, money market accounts strike a balance between accessibility and stability, making them an ideal choice for investors who value immediate access to their capital.
Low Risk
The investment strategy of money market accounts typically involves the allocation of funds into stable, short-term securities like government bonds and CDs. This conservative approach helps to preserve the principal amount, rendering money market accounts as low-risk investments.
For individuals who are averse to risk and prioritize the security of their capital, these accounts offer a sanctuary where their funds can grow modestly without exposure to the uncertainties of more aggressive investment options.
FDIC Insurance
A significant advantage of money market accounts is the protection afforded by the FDIC, which insures deposits up to $250,000 per depositor, per insured bank, across each account ownership category. This federal insurance acts as a safeguard against the loss of funds in the unlikely event of a bank failure, ensuring that depositors’ money is secure up to the insured limit.
This means that a person’s entire savings could be covered by FDIC insurance. This level of protection is a compelling reason for many to choose money market accounts as a safe place to grow their savings. However, others with larger portfolios may only have a portion of their savings insured.
Check-Writing and Debit Card Privileges
Money market accounts often come with the added convenience of check-writing and debit card access, features that are typically associated with checking accounts. This functionality allows for the payment of bills and management of daily expenses directly from the account, offering a degree of flexibility not commonly found in other savings instruments. For example, if you’re faced with an unexpected car repair bill, you can write a check directly from your MMA without the need to transfer funds.
Disadvantages of Money Market Accounts
Money market accounts also have a set of potential drawbacks that could interfere with your financial strategies and goals. Consider these three common disadvantages before opening an account:
Transaction Limits
Regulation D once limited savings account holders to six “convenient” transfers or withdrawals per month. This provision also applied to money market accounts. Although this federal regulation was amended by the Federal Reserve Board in April 2020 to allow for unlimited convenient transfers, some financial institutions have opted to keep their own set of limitations. These institutions maintain such restrictions to ensure the accounts remain primarily as savings vehicles, preserving their liquidity and stability.
If you’re someone who needs regular access to your funds, consider how these transaction limits could affect you. In situations where you require large sums of money quickly or if you’re a small business owner with numerous monthly transactions, these restrictions could be inconvenient.
Fees
Money market accounts can come with various fees that chip away at their benefits. For example, monthly maintenance fees can vary significantly between institutions, and there are often charges for surpassing transaction limits or not maintaining a minimum balance. While some fees can be avoided by meeting certain criteria, such as setting up direct deposits or maintaining a minimum combined balance across accounts, they still pose a potential financial drain.
Even a small monthly maintenance fee can add up to a considerable amount over a year and cut into interest earned, especially on smaller balances. As a result, the actual return on investment for consumers could be diminished, making money market accounts less advantageous for those who cannot consistently meet the conditions to have these fees waived.
Minimum Account Balance Requirements
Money market accounts often come with a minimum balance requirement that can range from a few hundred to several thousand dollars, depending on the institution. Falling below this threshold can lead to lower interest rates or monthly service fees, which can be significant. Financial institutions enforce these requirements to ensure that the funds within the account remain stable enough for profitable investment opportunities.
Money Market Account vs. Money Market Fund vs. Savings Account
Money market accounts, money market funds and savings accounts are different in key ways.
You might open a savings account because it is a secure place with a low minimum balance requirement to save money with the added benefit of accruing interest. These accounts are particularly well-suited for individuals looking to save for emergencies or future expenses without the complexities of managing a high balance or navigating the risks associated with investments.
But, when compared with a money market account, savings accounts usually pay very little interest and offer fewer features. A money market account, for example, can include limited check-writing capabilities.
Money market funds, on the other hand, can offer higher returns than both savings and money market accounts. These are investment vehicles that pool investors’ money to purchase short-term debt securities, such as Treasury bills and commercial paper. The FDIC does not insure them, but may be protected by the SIPC, providing a layer of security in the event of investment company failure.
Money market funds are suitable for investors seeking a low-risk investment that remains liquid, such as corporations managing short-term cash reserves or an individual looking to park funds they plan to use within the next few months. Money market funds may provide higher yields as they are dependent on the performance of the underlying securities, but they come with the caveat of not being FDIC-insured.
Bottom Line
Money market accounts (MMAs) offer a unique blend of features that cater to individuals seeking higher interest rates, liquidity and security for their savings. With the ability to earn more than traditional savings accounts, the convenience of check-writing and debit card access, and the protection of FDIC insurance, MMAs can be an attractive option. However, potential account holders must carefully consider the limitations, such as transaction limits, fees and minimum balance requirements, which can impact the overall benefits of these accounts.
Tips for Selecting Investments
- If you’re not sure how to structure your portfolio, SmartAsset’s asset allocation calculator can help you find a strategic mix of stocks, bonds and cash. The free tool shows you an asset allocation that aligns with your risk tolerance.
- Whether you need help deciding how much to allocate to savings and money market accounts or how much to invest in equities, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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