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A money market account is like having a savings account with the flexibility of a checking account.
And it almost always offers higher-than-usual interest rates (as an annual percentage yield) than savings and checking accounts.
The downside is that with a money market account, you only get six transactions (transfers or withdrawals) per month, or per account cycle of at least four weeks. This is because of Regulation D, a federal law that limits transfers and withdrawals from money market accounts. A transaction could mean writing a check, moving money from one account to another, or using a debit card to make a purchase.
If you go beyond the transaction limit, you may get hit with a fee. For example, US Bank charges $15 each time you go over the limit of six.
Because of the higher interest rates you get along with access to cash, keeping your money in a money market account may be beneficial when you’re saving for things like …
- An emergency fund
- A tax payment
- A vacation
Read on to learn more about money market accounts.
Pros of a money market account
1. You’ll earn higher interest on your money
Money market accounts tend to have higher interest rates than checking or savings accounts. The FDIC shows that the national average rate for money market accounts with deposits smaller than $100,000 is 0.15%. But rates can be even higher if you choose to open a money market account at an online bank. For example, Ally Bank offers 1% on a minimum $25,000 balance and Capital One 360 offers 1.85% on a minimum $10,000 balance.
2. Money market accounts are insured
Just like a savings account, the funds in your money market are insured as long as you’re doing business with a bank that’s insured by the FDIC or a credit union insured by the NCUA. Each account type is insured for up to $250,000 per depositor, each insured financial institution. That means that if the bank or credit union goes under, you’ll get your money back up to the insured amount.
3. You can write a few checks here and there
Money market accounts, like checking accounts, allow you to write checks. But unlike checking accounts, money market accounts limit you to only six transactions a month — transferring money from one account to another, debit purchases, bill pay and checks all count as transactions.
Cons of a money market account
1. You have to maintain a minimum balance
The first downside is that you might not have enough cash to open a money market account since some banks require a large initial deposit to open one or to earn the interest you’d like. Beyond the opening-deposit requirements, you may also need to maintain a certain balance in the account at all times in order to earn the best interest or avoid fees.
For instance, Capital One 360’s 1.85% APY is for balances of $10,000 or more, and TIAA Bank requires a minimum deposit of $10,000 to earn a 1.15% rate.
Basically, if you’re actively working on other financial goals that make it hard to gather up all that money, a money market account may not be for you.
2. You get dinged with fees for dipping below the minimum balance
Once you get together enough for a minimum balance, you have to make sure your money market account stays above that threshold. If you dip below a minimum balance requirement, you may get hit with a maintenance fee that pretty much cancels out the higher interest.
3. You only get six transactions each month or account cycle
Transactions can include certain types of withdrawals, transfers between accounts, debit purchases and check payments. Anything beyond the six and you may face a penalty. For example, Ally Bank charges $10 for each additional transaction and, as mentioned above, US Bank charges $15.
If you think you’ll need to use your money market account more as a checking account than savings, do some research on high-interest checking accounts.
Bottom line: Does a money market account make sense for you?
It all boils down to being able to access your money (in case of emergency or other infrequent need) and competitive interest rates. You may want to consider opening a money market account if you can relate to the following:
- You keep high balances in your checking account
- You write few checks or make few debits each month
- You don’t want to commit to other types of savings accounts that lock up your money for a certain amount of time, like CDs or IRAs
Remember that because of the transaction limits, a money market account probably isn’t the right choice if it’s for regular monthly expenses.
If you do want to open a money market account, do your research and find one with a competitive interest rate. Might as well make the most of the money that’s sitting there!