The pros and cons of money market accounts

The current economic environment is a saver’s paradise — if you ignore how inflation eats away at your money’s purchasing power. That makes finding the right place to stash your cash all the more important.

While relatively high interest rates are one of the benefits of a money market account, other savings vehicles sometimes come close to or beat out money market accounts. Therefore, it’s important to take a broader view and consider the pros and cons of money market accounts beyond how much interest they pay.

What are money market accounts?

A money market account is a deposit account that earns interest and usually comes with the ability to write checks and use a debit or ATM card. Think of one the way you do the checking or savings accounts that traditional or online banks and credit unions offer. Generally, money market accounts work much like these common deposit accounts. However, the specifics of some features, fees and requirements sometimes differ meaningfully, which can limit the utility of a money market account.

Don’t be confused by interchangeable names and abbreviations. Money market savings account (MMSA), money market deposit account (MMDA) and money market demand account (MMDA) all refer to the same thing — a money market account (MMA). To keep things consistent, we’ll go with money market account throughout this guide.

One other thing that’s consistent is Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insurance. Like checking and savings accounts, the federal government guarantees money market accounts up to $250,000 per account owner, per bank or credit union, as long as your financial institution is covered. You can use the FDIC’s BankFind tool or NCUA’s Credit Union Locator to check if an institution is insured.

Features of money market accounts

You’ll sometimes see money market accounts described as a combination of checking and savings accounts, and that does make sense when you look at the basic features most money market accounts offer:

• Check-writing privileges
• Debit/ATM cards
• Electronic transfers
• Online bill pay

If you’re wondering how to open a money market account, you do it the same way as a checking or savings account. Head to your local bank or credit union branch or go online, fill out an application and then fund the account via an external account transfer, a transfer from another account at the same bank or credit union, direct deposit or, often, mobile check deposit.

Disadvantages of money market accounts

Money market accounts often differ from traditional checking and savings accounts in several key ways. We surveyed the massive landscape of accounts to highlight the differences and ins and outs that matter most as you consider opening a money market account.

Limited transactions

Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn’t the best account for regular banking. This is a relic of Regulation D, a Federal Reserve Board policy that was ultimately removed at the beginning of the coronavirus pandemic when unlimited access to cash became an urgent concern for many deposit account owners.

Deposit and balance requirements

Minimum deposit and balance requirements can be a turnoff. Some money market accounts have no minimum requirements. But, like some savings and interest-bearing checking accounts, the balance you maintain can be tied to the interest rate you’ll receive as well as potential fees.

For example, at Discover Bank, you need $2,500 to open the bank’s money market account. But its “No. Fees. Period.” marketing language means you don’t have to maintain this $2,500 balance. If the account drops below that threshold, you will not pay a fee. In terms of interest, Discover pays 4.20% on balances of less than $100,000 and 4.25% on balances of $100,000 or more.

Fees

The fee structures of some money market accounts can present obstacles. You’ll need to be aware of any monthly maintenance fees and potential ways of waiving those fees.

Advantages of money market accounts

High interest rates

One major advantage of a money market account is that it tends to pay higher average interest rates than traditional checking and savings accounts. As of October 2023, the average interest rates for money market accounts was 0.65%, compared to 0.46% for savings accounts and 0.07% for interest checking accounts.

But it is worth noting that despite the higher average rates, the best rates available are often very similar between money market and savings accounts. For example, UFB Direct offers 5.25% APY on both its Money Market and High Yield Savings Accounts.

Flexible access

Another advantage of a money market account is that you have fast access to your balance. In addition to your ATM/debit card and electronic transfers, most banks and credit unions allow you to link your money market account to an existing checking or other account at the same institution.

Federal insurance

And, as we noted, that money — up to $250,000 — comes with the backing of the federal government as long as your financial institution is federally insured.

Are money market accounts the right choice for you?

In part because of the current high-interest-rate environment, it’s not possible to claim that money market accounts always pay higher interest rates than other accounts. Sometimes they do. Sometimes they don’t. It depends on the bank or credit union and the terms they attach to their accounts.

To make the best decision, weigh the pros and cons of the different types of accounts you’re considering against your financial needs.

Savings accounts don’t always come with debit/ATM cards, check-writing or online bill pay (but sometimes they do!), so if earning interest and having this flexibility matters, you might be better off with a money market account that pays a competitive rate.

With a certificate of deposit (CD), you can secure interest rates similar to savings and money market accounts, but you have to commit to keep your money locked up for a few months to several years or face penalties.

Money market funds are an entirely different ballgame. They are a type of mutual fund that doesn’t come with FDIC protection or the day-to-day flexibility of a savings or money market account.

If you’re looking for a place to keep an emergency fund or build savings for near-term needs and wants, such as buying a home or going on vacation, a money market account might make sense. If you’re okay with the interest rate your money market account pays — even if and when they move lower — you can keep your cash in it for the long term.