What is a money market account?

Money market accounts are a type of savings account that earns interest. Interest rates may be higher in return for a higher initial deposit and balance.

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A money market account is a type of savings account. You deposit money into the account through your bank or credit union, and in return for keeping it there you earn annual interest on the balance. The rate of interest is expressed as the annual percentage yield, or APY.

Money market accounts are different from other savings accounts in several ways. For one, when you fund the account for the first time, some banks require you to make a higher initial deposit than you would for other types of savings accounts. You could also need to maintain a higher balance to avoid minimum balance fees.

As with other types of savings accounts, you’re only allowed to make six transactions per month using your money market account, although withdrawals at an ATM or in person are not counted toward this limit. But money market accounts are the only type of savings account that allows you to write a check against the balance.

Note that money market accounts are not the same thing as money market funds, which are an investment vehicle you can buy into like stocks and bonds and don’t guarantee your rate of return.

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Money market accounts vs savings accounts

Money market accounts are a type of savings account, but they differ from other types of savings accounts in a few crucial ways. Whether you’d benefit from a money market account over a deposit savings accounts or a certificate of deposit (CD) depends on your own financial situation and how you plan to use the cash.

Learn more about the difference between a money market account versus a CD.

Interest rates

Money market accounts may have higher interest rates than other types of savings accounts. However, your results may vary: interest rates are determined largely by the amount you’re willing to deposit and the bank’s own policies. You could potentially get higher interest rates from a credit union or an online bank, so be sure to shop around for a high-yield savings account.

Both money market accounts and deposit savings accounts almost always have lower interest rates, on average, than CDs. However, it’s much more difficult to use the cash in a CD than the other two types of savings accounts.

Ready to find the best interest rate? Use Fiona to easily compare savings accounts.

Minimum balance

Typically, you’ll need to make a higher minimum deposit to initially fund the money market account. Many savings accounts allow you to open the account with no deposit at all, but you could be penalized for not funding the account, including incurring fees or missing out on the stated APY. You’ll also need to maintain a minimum balance, and not doing so could result in minimum balance fees.

Using the cash

Federal regulations permit you to make six transactions with your deposit savings account or money market savings account per month, after which banks are allowed to charge you for each subsequent transaction. (With some exceptions, you typically can’t use the cash in a CD, until it matures, without paying a fee.)

These transactions include preauthorized payments and electronic transfers. However, only money market accounts allow you to write a check with your balance. For both deposit accounts and money market accounts, ATM withdrawals and in-person withdrawals don’t count toward the six-transaction limit.

Government insurance

Both checking accounts and savings accounts are insured by government agencies. The Federal Deposit Insurance Corporation (FDIC) and the National Association of Credit Unions (NCUA) insure your money up to $250,000 in a bank or credit union, respectively. This means you’ll never be out the money you put in if the economy crashes.

Learn more about the FDIC and NCUA.

How interest is earned on a money market account

Money market accounts can earn anywhere from 0.01% interest to a little more than 2% interest. Interest is compounded monthly, but applied to the balance annually, so you’re earning interest on the fraction of interest you’d earn every month that year. This type of interest-earning schedule applies to most savings accounts, including CDs and deposit accounts.

Banks and credit unions display an annual percentage yield (APY) to estimate how much you’ll earn each year. The APY assumes your balance will remain flat for the year and that you won’t incur any fees. In some cases, depositing too little money or withdrawing too much can result in a lower APY, but depositing more money may result in a higher APY. Talk to your bank or credit union for more details.

Money market accounts vs money market funds

A money market fund is a type of investment, like purchasing stocks or other types of mutual funds. It’s a great way to diversify your investment portfolio if you have too much cash in other types of assets. However, it’s not the same thing as a money market account.

For one, as with any type of investment account, your interest rate is not guaranteed. It’s possible to lose money on your investment account, including all of the cash you initially put in. Money market funds are not guaranteed by the FDIC, the NCUA, or any other government agency. Money market accounts are.

But if the market does well, the money market fund could yield much better interest for you than a money market account. For that reason, it’s not a bad idea to have both a money market account and a money market fund. Keep your emergency fund in a savings account, so you have access to liquid cash when you need it, and use your investments to save for retirement or other big, long-term expenses.