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A Guide to Money Market Accounts
Money market deposit accounts may help your savings grow quicker than in a traditional savings account.
If you feel like you’re not saving enough, you’re not alone. The average person saves just 4% of their disposable income annually, meaning if you make $100,000 per year, you’re only setting aside about $4,000 each year.1
But how can you encourage yourself to save more? A good first step could be to find the right savings account for you.
There are many types of savings accounts out there. You’ve probably heard of a high-yield savings account, which can be a great option to help grow your money.
Another potential option is a money market account. These accounts earn interest like savings accounts, but actually function as a hybrid between a savings and checking account.
Wondering if a money market is right for your savings goals? Let’s look at how it works and what to expect when you open one.
Key Takeaways
Money market accounts tend to earn higher rates than traditional checking or savings accounts.
Money markets often have monthly withdrawal limits set by the financial institution.
Money market deposit accounts through a chartered bank are FDIC insured, giving you greater peace of mind that your money is safe.
What Is a Money Market Account?
A money market deposit account (MMDA) is a type of deposit account that earns interest, usually at a higher rate than a traditional savings account .
MMDA rates are listed as an Annual Percentage Yield (APY) which refers to the amount of interest the account may earn over the course of the year using compounded interest. The higher the APY is, the more the account may earn.
While MMDAs earn a higher rate than traditional savings accounts, they tend to have rates far lower than high-yield savings accounts. Many high-yield savings accounts have rates 11x higher than traditional savings accounts.2
Unlike high-yield or traditional savings accounts, MMDAs often come with the ability to write checks or use a debit card to withdraw funds each month, up to certain limits. Most institutions limit withdrawals or transfers from MMDAs to six per month.3
It’s common to have a checking account in addition to an MMDA to make sure you’re able to pay all of your bills without running up against the withdrawal limit.
Where to Find Money Market Deposit Accounts
MMDAs are available at many financial institutions, including banks and credit unions. If the institution is an FDIC or NCUA member, MMDAs are FDIC insured or NCUA insured up to legal limits, which are $250,000 per depositor, per ownership type, per institution.4
Money Market Mutual Funds
In addition to MMDAs, you may also see money market mutual funds (MMMFs) through brokerage firms. Despite the similarity in their names, MMMFs are an investment account, not a savings account.
Since they’re investment accounts, MMMFs aren’t FDIC or NCUA-insured and they may lose value over time.5 If you’re interested in adding an MMMF to your portfolio, discuss your situation with a financial advisor.
Money Markets vs. Savings and Checking Accounts
As mentioned earlier, MMDAs may help grow your savings. While these accounts share some qualities with savings and checking accounts, there are some key differences you should know about.
Rates are clearly a high priority in account shopping, and rates will vary by bank. When reviewing average rates from September 2023, the lowest rates in the market were checking accounts,6 followed by traditional savings. Average MMDA rates settled slightly higher than traditional savings and only a few challenged rates for the average high-yield savings.7˒8˒9
The chart below compares MMDA features, beyond rates, with other account types potentially offered through a chartered bank.
Money Market Deposit Accounts | Traditional Savings Accounts | High-yield Savings Account | Checking Accounts | |
|---|---|---|---|---|
FDIC Insurance* | Yes | Yes | Yes | Yes |
Check Writing Capabilities | Yes | No | No | Yes |
Debit Cards Available | Yes | Sometimes | Sometimes | Yes |
Liquidity | Typically limited to six withdrawals per month10 | May have monthly withdrawal limits | May have monthly withdrawal limits | Typically no withdrawal limits |
* If held at a chartered bank
Is a Money Market Deposit Account Right for You?
MMDAs offer a flexible way to grow your wealth over time but also come with a few restrictions.
Here are a few considerations to keep in mind when deciding if an MMDA is right for you.
Evaluate Your Savings Style: If you routinely leave a savings buffer in your checking account and only write a few checks each month, opening an MMDA may be a great way to put that bit of savings to work. You could earn a higher rate than in your checking account but still have the convenience of some check writing.
Consider Your Access Needs: Before opening an MMDA, consider how often you may need the funds. If you don’t need frequent access, a high-yield savings account may offer you a better rate to make your money work harder. If you choose a high-yield account that also doesn’t limit transfers, you potentially wouldn’t sacrifice much convenience for that extra growth opportunity.
Assess How You Spend: MMDAs usually come with check writing abilities, but many have withdrawal limits. If checks are part of your regular spending, this account type may not work well for you as a substitute for a checking account.
As always, when considering what savings option may be right for you, consult a financial advisor to discuss your specific financial situation.
Final Thoughts
MMDAs give you a simple way to save money while earning higher rates than you’d find with a traditional checking or savings account. They also come with a few unique features that savings accounts usually don’t have, such as writing checks.
If you’re still wondering if a MMDA is the right savings tool for you, learn more about how to choose the right savings account for your needs and goals.