What is a Money Market Account?
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In the United States, a money market account (MMA) is a type of savings account that blends the benefits of both savings and checking accounts, often offering higher interest rates than standard savings accounts. It provides a secure place to store money while earning interest, with the added convenience of limited check-writing or debit card access.
A money market account is a flexible and secure savings option for those looking to earn more interest than a regular savings account while maintaining easy access to their funds. Though they often come with higher minimum balance requirements and some transaction limitations, MMAs offer a solid balance between liquidity, safety, and growth potential. Whether you’re saving for an emergency fund or short-term goals, MMAs can provide the security and returns you need with relatively low risk.
In the United States, money market accounts are offered by banks and credit unions. The interest rate on a money market account is usually higher than the interest paid by a normal savings account with the same bank or credit union.
Banks and credit unions will only allow you to open a money market account if you can do the minimum initial deposit, and there will also be rules about how much you need to keep in your money market account while it is active. If your balance drops below a certain threshold, you may be charged a fee (often called a service charge) for failing to maintain the minimum balance.
Key Features of a Money Market Account in the United States
- Higher Interest Rates: Compared to traditional savings accounts, money market accounts typically offer higher returns. However, interest rates can fluctuate with market conditions. Banks often reward higher balances with better rates, making MMAs an attractive option for those with more substantial savings.
- Minimum Balance Requirements: MMAs often have higher minimum balance requirements, typically ranging from $2,500 to $10,000. Failing to maintain the required balance can result in monthly maintenance fees or reduced interest rates.
- Liquidity and Access: One of the standout features of a money market account is the flexibility it offers. While considered a type of savings account, MMAs also provide limited check-writing privileges, along with the ability to use a debit card or ATM access to withdraw funds. This makes them more accessible than certificates of deposit (CDs), where funds are tied up for a fixed period.
- Transaction Limits: Money market accounts are subject to federal Regulation D, which limits certain types of withdrawals and transfers to six per month. These include electronic transfers, debit card transactions, and checks. However, in-person withdrawals or ATM transactions are typically not restricted.
- FDIC and NCUA Insurance: Like other savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts, up to $250,000 per depositor. This ensures that your money is protected if the financial institution fails.
Understanding the Background
The money market mutual funds (MMMFs), also known as money market funds (MMFs) were introduced in the 1970s, with brokerages and mutual fund companies selling shares on the U.S. market.
Until the early 1980s, the U.S. government had a cap in place, limiting how much interest a bank or credit union could offer their clients on savings accounts. When money market mutual funds offered investors better growth, the banks and credit unions could not compete by increasing their interest rates above the cap, so instead they began offering other perks, often in the form of small gifts such as toasters, waffle irons, and other home appliances. Still, competing in this way was not very efficient, and many individuals began favoring the higher interest paying money market mutual funds over traditional savings accounts.
After being lobbyed by the banking industry, the U.S. Congress passed the Garn-St. Germain Depository Institutions Act in 1982. When this new law came into force, banks and credit unions could begin offering money market accounts that paid a money market rate – they no longer had to stay below the cap if the money market rate was higher. Compared to money market mutual funds, the money market accounts where less risky, and they quickly became popular among individuals who wanted a somewhat higher interest rate than for a normal savings account but were not willing to take the bigger risks associated with investing the money.
Benefits of a Money Market Account
- Higher Returns with Safety: Money market accounts offer higher interest rates than traditional savings accounts, making them an attractive choice for those seeking better returns while maintaining security. The safety provided by FDIC or NCUA insurance adds an extra layer of protection.
- Easy Access to Funds: Unlike CDs or other long-term savings vehicles, money market accounts provide liquidity, allowing you to withdraw funds or use checks and debit cards. This flexibility makes them a great option for an emergency fund or short-term savings goals, such as saving for a car or vacation.
- Low Risk: With government insurance backing, MMAs offer a low-risk way to grow your savings. This makes them ideal for risk-averse individuals or those seeking a stable place to park their funds.
- Better Interest Than Basic Savings: While not as high as certain investment vehicles, MMAs generally outperform traditional savings accounts, offering a balance between accessibility and earning potential.
Drawbacks of a Money Market Account
- High Minimum Balances: To earn the higher interest rates offered by MMAs, account holders must often maintain high minimum balances. For those unable to meet these requirements, fees or lower interest rates may negate the benefits.
- Limited Transactions: Due to federal regulations, MMAs limit certain transactions to six per month, which may be a disadvantage if you need more frequent access to your funds.
- Interest Rates Can Vary: Unlike fixed-rate accounts, the interest rates in MMAs may fluctuate based on market conditions. If interest rates drop, your earnings may be lower than expected.
Insurance Against Provider Failure
Before you put any money into a money market account, it is a good idea to check if and how your money will be protected if the firm where you have your account fails. For more information, you can visit the Securities Investor Protection Corporation (SIPC).
https://www.sipc.org/
You can look up an account´s FDIC protection by calling the FDIC Call Center at (877) 275-3342 (877-ASK-FDIC). The number for hearing impaired individuals is (800) 877-8339.
Another good source of information is FDIC’s Electronic Deposit Insurance Estimator (EDIE)
If the account provider is a credit union, the relevant insurance is the insurance provided by the National Credit Union Association (NCUA).
http://webapps.ncua.gov/ins/calculator.html
When to Use a Money Market Account
A money market account is a great choice for individuals who need short-term liquidity combined with higher returns than a traditional savings account. It’s well-suited for emergency funds and short-term goals, and it can also be an okay choice for large balances where you want the low-risk and relative ease of access.
- Emergency funds: MMAs offer a secure and accessible place to store emergency savings, allowing easy access if needed while earning interest.
- Short-Term Goals: MMAs are ideal for saving toward short-term financial goals, such as saving for a vacation.
- Large Balances: If you have significant savings that you don’t plan to use immediately, an MMA can help maximize interest earnings without locking your funds away in long-term investments like CDs.
What is a Money Market Deposit Account (MMDA)?
Money market accounts (MMAs) are sometimes called money market deposit accounts (MMDAs). The two terms are used interchangeably.
What’s the difference between a money market account and a money market mutual fund account?
A money market account is a savings account / checking account, while a money market mutual fund account is considered an investment. Some money market mutual fund accounts will come with check-writing privileges, but they are still considered investment accounts.
Money market mutual fund accounts are offered by brokerage firms and fund companies, and while they can have close ties to banks and credit unions, they are their own entities and operate under different regulations.