“Maximizing Your Savings with Money Market Accounts”

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How Do Money Market Accounts Work?

Money market accounts are interest-yielding bank accounts known for their liquidity. They provide easy access to your money while your balance earns interest in the background—sort of like a checking and savings account in one. These traits make money market accounts ideal for short-term savings goals.

You can add money on a rolling basis with no contribution limits, and it’s relatively easy to tap those funds when you’re ready. Money market accounts also offer competitive interest yields that typically outperform traditional savings accounts. Here’s how they work.

How Do Money Market Accounts Work?

You can open a money market account at financial institutions such as banks and credit unions. It’s an interest-earning account that can help you reach your financial goals a little faster. Annual percentage yields (APYs) vary, but some currently exceed 5%. Average rates on traditional savings accounts are just 0.42%, according to the Federal Deposit Insurance Corp. (FDIC).

It’s common for money market accounts to come with a debit card or checkbook. This makes it easy to access your funds, whether you’re paying bills or making purchases online or in person. Just bear in mind that your financial institution may limit how many convenient withdrawals you can make per month.

Pros and Cons of Money Market Accounts

Pros

• Higher-than-average interest rates: This allows your money to grow more quickly. If your account has a 5.17% APY, for example, you’ll earn $51.70 annually for every $1,000 you keep in the account.
• Low risk: Unlike many other types of investments, your account balance won’t decrease due to market fluctuations. It’s possible to lose money due to fees, however, so be sure to stay aware of minimum account balance requirements and withdrawal limits that could result in a penalty if not adhered to (more on that later).
• Liquidity: Money market accounts make it easy to withdraw funds when you need them. If you encounter a financial emergency or are ready to move on a financial goal, that money will be there.
• Peace of mind: Money market accounts held at banks are FDIC-insured for up to $250,000 per depositor, per financial institution. Credit unions offer similar coverage through the National Credit Union Administration (NCUA).

Cons

• More modest returns than other investments: Yields on money market accounts may be lower than what’s offered on high-yield savings accounts (HYSAs) and certificates of deposit (CDs). At the time of this writing, some HYSAs and CDs offer rates as high or higher than 5%. Meanwhile, the stock market has produced average annualized returns of around 10% for the last century.
• Minimum balance requirements: Some money market accounts require a minimum opening deposit. There might also be a minimum balance requirement once the account is active. If your balance drops below a certain amount, you could be charged a fee. Monthly maintenance fees may also apply.
• Limits on convenient withdrawals: Every financial institution is different, but you may be limited to six convenient withdrawals per month. That may include electronic transfers, along with debit and check transactions.

What Are the Best Uses for a Money Market Account?

A money market account can be a great place to save money for short-term financial goals. Here are some examples of what that might look like.

1. Building Your Emergency Fund

The rule of thumb is to set aside three to six months’ worth of expenses in an emergency fund. If you run into a financial surprise, you’ll want quick access to your money. Liquidity is one of the biggest advantages of a money market account. Your cash savings can also earn interest.

2. Saving for a Down Payment on a Home or Car

If you’re saving a down payment for a big purchase, the interest you’ll earn with a money market account can be appealing. Let’s say your goal is to save up 5% for a down payment on a $350,000 home. That works out to $17,500. Interest can add up fast on such a large balance. And when you’re ready to put in an offer, it’s easy to withdraw funds.

3. Padding Your Travel Fund

Whether it’s a family vacation or a getaway with friends, travel costs can put a big dent in your budget. Money market accounts let you save gradually while earning interest along the way. Your money will be there waiting for you when you’re ready to finalize your plans. Having a debit card or checkbook adds another layer of liquidity.

4. Starting a Business

If you’re self-funding a new business venture, you may want to build a financial cushion before making the leap. A money market account can serve as a holding place for start-up capital. It can be difficult for a young company to qualify for a small business loan. With a money market account, your money can grow so that you’re earning interest—instead of paying interest on a loan.

What Are the Worst Uses for a Money Market Account?

Saving for Retirement

Tax-advantaged retirement accounts can help you build your nest egg while scoring attractive tax perks. For example, 401(k) contributions can reduce your taxable income. If you have access to an employer match, you’ll earn additional money from your employer as you contribute to your retirement. Roth retirement accounts can also provide tax-free income in retirement. This is all to say that a money market account isn’t designed to fund your retirement.

Day-to-Day Spending

Remember that money market accounts aren’t meant to replace a checking account, which generally allows for unlimited transactions. The debit card or checkbook you’ll get with a money market account can allow for easy spending, but you’ll likely run into fees if you surpass your transaction limit.

Holding Balances Above $250,000

At FDIC-insured institutions, your money market account (combined with any other deposit accounts you hold at the institution) is covered up to $250,000 per depositor—but you could be on your own for anything beyond that. One workaround is to split large amounts of money across multiple accounts at different financial institutions.

The Bottom Line

A money market account can be a simple and effective way to earn interest on your savings. This type of account is ideal for money you’re setting aside for short-term financial goals. Interest yields are often higher when compared with traditional savings accounts, and liquidity isn’t an issue.

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