The pros and cons of money market accounts

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A recent study from Santander Bank shows that less than 20% of Americans are taking advantage of higher-rate savings account options. One account worth considering is a money market account (MMAs) — a low-risk option where you can park your savings and earn above-average interest rates.

When deciding where to invest your money, it's important to weigh the pros and cons of money market accounts.

What is a money market account?

A money market account is a hybrid financial product that combines the features of checking and savings accounts. MMAs typically offer higher interest rates than traditional savings accounts while providing some transaction features, such as check-writing and debit card access. 

According to the FDIC, the average rate for a money market account is 0.67% APY. But don’t settle for average. The best money market accounts currently offer at least 4.00% APY, which can boost your savings.

However, these accounts often come with transaction limits. For example, Ally Bank may close your money market account if you regularly exceed ten transactions per statement cycle.

Pros of money market accounts

Higher interest rates compared to traditional savings accounts

One of the biggest advantages of money market accounts is the chance to earn more interest. Elliot J. Pepper, certified public accountant and certified financial planner, says, “For savings goals that are a few months to a couple of years away, money market accounts offer a good combination of growth and access.”

She notes that money market accounts can be a great place for your emergency fund due to the ability to earn more interest while having access to your money at a moment’s notice.

FDIC or NCUA insurance coverage 

Money market accounts come with little risk of losing money if you stay within the FDIC limit of $250,000 per depositor per account type (or the NCUA limit for credit union accounts).

Funds are easily accessible

Easy access to your funds is a key selling point of MMAs. While checking accounts typically offer little to no interest, a money market account can serve as a higher-yielding alternative for less frequent bill payments and short-term savings.

For example, you can shift your cash into a money market account and use it to pay a few bills — your monthly utility bill, for example — and use other payment methods, such as a credit card, for your everyday spending.

Cons of money market accounts

Potentially higher minimum balance requirement

Some money market accounts require a minimum balance to avoid monthly fees or to qualify for the highest interest rate. For example, UFB Direct’s money market account requires a minimum balance of $5,000 to avoid a $10 monthly fee.

Transaction limits

While MMAs often provide check-writing and debit card features, they're not intended to function exactly like checking accounts. Banks and credit unions typically impose transaction limits before charging fees for additional transactions. In other words, a money market account should not be your source for buying your morning coffee.

Variable interest rates

Unlike CDs with fixed rates, one potential disadvantage of money market accounts is that their rates are variable and can change at any time. While rates for the best money market accounts look great at the moment, they will adjust whenever the Federal Reserve cuts rates. The variability of rates isn’t always bad news, though: If rates go up, money market accounts will pay more interest.

Money market accounts vs. other savings options

If you’re thinking about opening a money market account, here’s how they stack up against some of the other options for your savings.

Money market accounts vs. traditional savings accounts

MMAs generally offer higher interest rates and more convenient access to funds than standard savings accounts. However, if you’re concerned about overspending, a traditional savings account may provide a helpful barrier to access since they have lower monthly transaction limits.

Money market accounts vs. certificates of deposit (CDs)

When you open a traditional CD, you’ll get the promise of a fixed rate of return over a set period of time. That helps you calculate exactly how much you’ll earn. For example, if you open a 1-year CD with a 5.00% APY today with $10,000, you’ll be able to withdraw $10,500 in 12 months from now. 

If you open a money market with a 5.00% APY, there’s no guarantee that the rate will stay the same since the rates are variable.

CDs also have early withdrawal penalties, which makes the funds much harder to access. Money market accounts, on the other hand, will not penalize you for transferring the funds or making payments — unless you exceed your institution’s monthly transaction limit.

Money market accounts vs. high-yield savings accounts

MMAs are closest to high-yield savings accounts. Both pay higher rates than traditional savings accounts, and both offer easy access to the money in the account. 

The big difference is that some banks and credit unions offer checkbooks and debit cards for money market accounts, while high-yield savings accounts do not come with these tools. Pepper says that high-yield savings accounts tend to be a better fit if you typically maintain a smaller balance.

“Make sure to choose an account that aligns with your ability to maintain the required balance to avoid fees and earn the advertised interest rate,” says Pepper. “Consider any fees associated with falling below the minimum balance.”

Is a money market account the right choice for you?

A money market account can be a valuable addition to your suite of personal finance tools, but these accounts aren’t the same across the entire industry. Some banks and credit unions have different fee and tiered rate structures.

When deciding if a money market account suits your financial needs, consider your specific goals, spending habits, and ability to maintain minimum balances. Pepper advises, "Compare interest rates, understand access and liquidity options, and evaluate fees and minimum balance requirements to determine the best fit."

Remember, you're not limited to choosing just one savings option. You can open multiple accounts to manage various savings goals effectively. For example, a money market account can be a good place for your emergency fund, while a 1-year CD may be a good choice for storing money for a down payment on a home.

Frequently asked questions

The bottom line

Money market accounts offer an attractive combination of higher interest rates and liquidity. However, be mindful of minimum balance requirements and transaction limits. While they're not intended to replace your primary checking account, they can be a valuable tool for growing your savings while maintaining accessibility. Shop around for the best money market account rates and terms that line up with your financial objectives.

Editorial disclosure: 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.