What is a money market account? 5 things to know

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Worried about the rising interest rates and the possibility of an impending recession? It might be time to shift your focus toward saving and securing your hard-earned cash.

One way to keep your money safe while still having easy access is through a money market account. These accounts offer the interest rates of a savings account with the convenience of a checking account.

Here are five things you need to know about money market accounts and how they work.

1. They combine the benefits of checking and savings accounts

Imagine having the best of both worlds when it comes to your finances. That's exactly what money market accounts offer. Their primary purpose is to provide a safe and liquid place to place your money while earning a solid interest rate.

These accounts have a higher interest rate than regular savings accounts, allowing you to earn more on your funds. You can also make payments, issue checks, or transfer funds from your money market account — a feature many savings accounts don't have. Like a checking account, money market accounts come with perks like debit cards and online banking access.

You'll be able to earn interest while maintaining the flexibility to access your money when you need to.

2. They offer a higher interest rate than regular savings accounts

The average savings account interest rate is 0.58% as of October 2023. Today’s best money market accounts offer rates as high as 5%. This means you can earn more money on your savings over time.

Most online banks offer money market accounts. These banks often provide higher yields because they don't pay the overhead costs to maintain a physical branch.

Money market account interest rates aren’t fixed. They can fluctuate based on changes in the broader market. For example, if the Federal Reserve raises interest rates, your bank may increase the rates on their accounts. If interest rates decline, banks may lower their savings account rates.

Money market accounts provide competitive interest rates. But returns are often lower than less liquid accounts, like a high-yield savings account or certificates of deposit (CDs).

3. They often come with minimum balance requirements

Money market accounts have minimum balance requirements. That means you’ll need to maintain a certain amount to keep your account open or earn the highest possible interest rate.

These requirements vary depending on the financial institution. Some minimum balance requirements range from a few hundred to several thousand dollars. Some banks won’t have a requirement at all.

Banks may offer higher interest rates on your savings or waive certain fees if you maintain the minimum balance. These benefits can help your money grow faster and allow you to save more. Make sure you’re choosing a money market account with a minimum balance requirement you can meet without putting a strain on your finances.

4. They may not completely replace your checking account

Money market accounts offer many benefits but may not entirely replace your checking account.

Many money market accounts limit the number of transactions you can make in a given period. These restrictions may be on the number of checks you can write or the number of transfers you can make. A dedicated checking account may make more sense if you make frequent transactions or have a high volume of payments.

While you can access the funds in your money market account through checks or electronic transfers, it may be harder to withdraw cash. Some money market accounts don’t offer debit cards or ATM access. If you rely on these features for your daily transactions, keeping a separate checking account is a good idea.

5. Most banks offering money market accounts are secure

Most banks must adhere to strict financial regulations to ensure the safety of their customers’ deposits. As a result, money market accounts offered by reputable online banks are considered very secure.

Many online banks are also insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). These organizations protect your funds in case the bank or credit union fails. The FDIC covers up to $250,000 per person per account. The NCUA offers similar protection.

Researching and choosing a reputable bank with a strong track record is always a good idea. Most online banks will prioritize security and take steps to protect your funds and personal information.

Alternatives to a money market account

While money market accounts are convenient and flexible, they’re not for everyone. In most cases, these accounts are best for short-term savings.

Depending on your goals, you may want to consider one of these alternatives:

• High-yield savings accounts: These accounts offer competitive interest rates, often higher than money market accounts. High-yield accounts also often have no minimum balance requirements.
• Certificates of Deposit (CDs): You agree to keep your money in a CD for a specified period, ranging from a few months to several years. In return, you receive a fixed interest rate often higher than standard savings accounts. CDs are suitable for those who don't need immediate access to their funds and want to earn a stable return.
• Treasury bonds: These are debt securities issued by the U.S. government. They offer a low-risk investment option with fixed interest rates and specific maturity dates. These options are suitable for long-term savings goals or diversifying your investment portfolio.
• Money market mutual funds: These funds, offered by brokerage firms, invest in short-term, low-risk securities. They have similar benefits to money market accounts but are not FDIC insured. Money market mutual funds offer higher potential returns for higher risk.

The bottom line

Money market accounts can be a crucial part of your financial strategy. They can help your savings grow while providing access to your money when needed. This can prevent you from going into debt to cover an unexpected expense.

Consider balance requirements, fees, and limitations when shopping for a money market account. That way, you can find the right account for you and your goals.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.