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How does a money market account work?

A money market account is a financial product offered by many banks and credit unions that allows you to store your funds securely while earning interest. Money market accounts combine some features of checking accounts and savings accounts.

How do money market accounts work?

Money market accounts are similar to savings accounts, but they have certain transactional features like checking accounts. For example, a money market account may come with a debit card and checks. Money deposited in a money market account earns interest – an advantage over standard checking accounts, which typically don’t earn interest on the account balance.

Some money market accounts require a minimum deposit to open and may charge a fee if the balance falls below a specified minimum. Money can be added to or withdrawn from a money market account, but depending on the bank or credit union, there may be a limit to the number of transactions allowed each statement period – typically six, as with accounts savings.

Money market accounts pay a variable interest rate, so the rate consumers earn on their money can fluctuate over time. It is common for these accounts to have tiered rates, meaning that higher balances are rewarded with a higher annual percentage yield (APY). Money market accounts tend to offer higher returns than traditional savings accounts.

What are the benefits of money market accounts?

  • The money you put in a money market account is insured up to $250,000 per account holder and $500,000 for joint accounts at federally insured banks and credit unions.
  • Money market accounts offer competitive interest rates. Take a look at the top money market accounts to see current rates.
  • Money market accounts can come with a debit card and/or checks, providing more ways to access cash than a savings account.

What are the disadvantages of money market accounts?

  • A money market account generally requires a considerably larger deposit than a savings account. Often accounts require $1,000 or more.
  • Due to a federal rule A federal banking rule, known as Regulation D, has historically limited withdrawals and transfers to six per statement cycle. The rule was revised in 2020 to eliminate the six-withdrawal limit, but some banks still impose it on money market (and savings) accounts, giving money market accounts less flexibility than checking accounts standard.
  • Although money market accounts can often offer a higher return than a savings account, this is not always the case. Be sure to shop around and compare options.

Who Should Have a Money Market Account?

Money market accounts are best for those saving for short-term goals. For example, if you are creating an emergency fund, a money market account might be a good place to store that money. But if you’re saving for retirement, then a CD would be a better fit.

“A money market may be appropriate for money that you don’t need right now, but also is not appropriate for a long-term need that you might invest in,” says Charles H. Thomas III. , CFP, founder of Intrepid Eagle Finance. “Something like an emergency fund or a rainy day fund might be an appropriate use for a money market.”

Can you lose money in a money market account?

You won’t lose money in a money market account if you work with a financial institution that is federally insured. The Federal Deposit Insurance Corp. and the National Credit Union Administration insure money market and other accounts up to $250,000, so they’re protected in the event a financial institution fails.

At the end of the line

Although money market accounts and savings accounts both have withdrawal limits, money market accounts have a few small differences that give them greater flexibility in terms of accessing money. They are usually accompanied by checks and/or a debit card.

Money market accounts also tend to have high APYs, but they can also have higher fees and minimum requirements than checking or savings accounts. It’s worth looking into different money market account options to find the best APYs and lower fees.

–Freelance writer Sarah Sharkey contributed to an earlier version of this article.