When you hear the words “bank account,” you may think of two things: a checking account and a savings account.
But here’s a different option you may not have heard of: money market accounts.
What Is a Money Market Account?
A money market account is like a cross between a savings account and checking account.
It’s like a savings account in that its primary purpose is to, well… save money.
But like checking accounts, they often allow you to make electronic payments, write checks and withdraw money with a debit card, although the number of transactions is usually limited.
One big difference? A money market account typically earns more interest than a typical savings or checking account. Money market accounts also tend to have higher minimum balances.
You may be thinking that a money market account sounds a lot like a certificate of deposit (CD). There are a couple key differences, though.
When you open a money market account, the interest rate can fluctuate, and you may use it to make occasional payments. But with a CD the interest rate is fixed, and you agree to deposit money for a certain amount of time. So if you open a five-year CD, you aren’t meant to withdraw that money for five years.
The Pros and Cons of a Money Market Account
Like all bank accounts, money market accounts have good and bad features. Read carefully before deciding if this account is for you.
The Pros of Money Market Accounts
Some key advantages of money market accounts include:
They often earn more interest than savings accounts.
As of July 8, 2019, the average annual percentage yield (APY) for a money market account was 0.18%, compared with 0.1% for a savings account. (Keep in mind that online high-yield savings accounts and online money market accounts often have APYs of 2% or higher.)
Your money is safe.
Like the money you put in a checking or savings account, the funds you deposit in a money market account up to $250,000 are insured by the Federal Deposit Insurance Corp. (FDIC).
Your money is more accessible than it would be in a CD.
CDs usually offer even higher interest rates than money market accounts, so people who are truly committed to earning more interest usually like CDs. However, you can access funds from a money market account at any time, whereas if you withdraw money early from your CD, you have to pay a fee.
You can often make payments directly from a money market account.
Some banks will let you write checks from your money market account and will even provide you with a debit card specifically for the account.
The Cons of Money Market Accounts
There are several disadvantages of money market accounts. They include:
You’re limited to six transactions per month.
This includes both withdrawals and deposits. This rule could be a blessing in disguise if it keeps you from spending away your savings. However, you should still know that you can’t spend as easily as you would with a checking account.
You’ll need a high balance to earn the best interest rates.
Plenty of banks allow you to open a money market account with little to no money. The downside? You won’t earn much interest. For example, a Capital One 360 money market account gives you 0.85% APY when you have less than $10,000 in your account. Once you hit $10,000, Capital One bumps that APY up to 2%.
Most money market accounts have lower APYs than what CDs offer.
For instance, a one-year CD with Sallie Mae has a 2.65% APY, while its money market account APY is only 2.2%.
Should I Open a Money Market Account?
If you’re simply looking for a savings account replacement so you can put your money away and not touch it for a long time, you might want to consider a CD. They typically offer higher interest rates than money market accounts, and you’re not meant to withdraw money from a CD until its maturity date.
But if you want to earn more interest than you would from a checking or savings account, but you may need to access your money for the occasional expense, a money market account might be a better option.
Because you can pay out of your money market account up to six times per month, it’s a good place to store money and make the rare payment from the account.
In fact, maybe you don’t think you’ll need to make occasional payments from your money market account, but you’d still like the option. That’s why a money market account is a great option for your emergency fund. You can earn interest, but if you need money because you lose your job or are short on rent, you can withdraw from it without being penalized as you would be if you took your money out of a CD.
Laura Grace Tarpley is a freelance writer and editor. Follow her on Twitter @lgtarpley.