The basics of money market accounts

As you explore options for where to keep your money besides a checking account, you may wonder: What is a money market account?

Money market accounts are a great way to make your hard-earned cash work harder to achieve your goals because, like basic savings accounts, they regularly pay interest on your balance. A standard offering at banking institutions, money market accounts can be thought of as a stepped-up savings account.

Let's take a look at the ins and outs of money market accounts and how they might fit into your financial picture.

A money market account, or MMA, is a type of interest-bearing savings account offered by banks and credit unions. MMAs share some features with checking accounts, such as the ability to use checks and debit cards for purchases, but they also have qualities that promote savings, such as high minimum balances and limits on transactions.

The money you hold in an MMA is just as safe as any other bank account and is insured to the limits of either the FDIC or NCUA. Your deposits and any interest earnings aren't invested in any sort of market—that would be the case if you had a money market mutual fund, which is an entirely different product. With MMAs, the "market" only has one effect: The institution bases its interest rates on it.

The combination of growth, liquidity and safety makes an MMA a useful way to save for short-term goals. That's because while you store up your wedding or vacation funds, you'll also steadily gain interest at a competitive rate. Many people also use MMAs to hold and grow their emergency savings.

Money market accounts pay a variable interest rate, so the amount you earn will change throughout the year based on market conditions. To open an account, you typically need a minimum amount—sometimes as low as $1,000, but often $10,000 or more—and you generally have to keep your balance above a certain level.

While you typically can make unlimited deposits to the account in the same way you'd put money into a checking or savings account, your withdrawals and transfers may have limitations, either in the number or amount, as set by the institution. A common one is six "convenient transfers" per month, which includes almost any kind of debit transaction, such as by check or card, an automatic draft (like direct billing) or an account-to-account transfer. This used to be a Federal Reserve rule, and although the Fed stopped requiring it in 2020, some institutions have kept the limit.

These accounts shine as vehicles to build short-term savings, but they don't suit every purpose. Here are some reasons you might want an MMA:

MMAs generally offer higher returns than traditional savings accounts. In mid-July 2023, for example, the average interest rate for an MMA was 0.63% while the average rate for a savings account was 0.42%.

However, it's worth noting that other interest-bearing accounts can produce higher yields than MMAs, including certificates of deposits (CDs). Money market accounts also aren't ideal for trying to grow your long-term or retirement savings as you're unlikely to get comparable returns to what 401(k)s and IRAs can offer for slightly more risk.

Whether you suddenly need funds to pay a medical bill or plan a withdrawal to buy a car, getting your money out of an MMA the day that you need it is relatively easy to do.

Yet, these accounts are not intended to be used like checking accounts to pay bills or make everyday purchases. In addition to the potential for fees for excess withdrawals or falling below a minimum balance, any money you take out is no longer earning interest.

Although failures of financial institutions are rare, you don't need to worry about losing your money if it's kept in a federally insured bank or credit union. MMAs are included in the coverage guaranteed by the FDIC or NCUA up to $250,000 per individual per institution.

In addition, you won't lose money deposited in an MMA even if the markets change. Money market accounts can be a stable piece among your mix of investments.

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Money market accounts can offer various features. Focusing on these key comparison points can help you pick an MMA that is a good match for your preferences and goals.

The interest rate for MMAs is referred to as the annual percentage yield, or APY. It shows the rate of return you can expect on your account within a year, adding in compound interest. You can compare the APYs of multiple accounts to determine which one is the most competitive.

You may be able to find an MMA without a minimum opening deposit, but the interest rates on these will likely be lower than accounts that do demand a minimum amount. Generally, the higher the minimum balance, the higher the interest rate you can get, but it's worth shopping around. After you've opened the account, you'll probably need to keep a minimum balance to avoid paying fees.

Some money market accounts charge a monthly service charge or maintenance fee that may or may not be waived if you maintain a minimum balance. Institutions also may charge for exceeding withdrawal limits or making certain kinds of transfers. Keep these details in mind as you compare accounts—you don't want to lose money to avoidable fees.

MMAs are primarily a savings tool, so they're usually designed to curb spending. But if you need your account to have check-writing and debit card capabilities, make sure you won't be burdened by any limits the institution has on how many withdrawals you can make per month or by limits on the amount per transaction. If you need an account that's more liquid, you may want to look at an interest-bearing or rewards checking account instead.

If you open an MMA at a place where you already have a checking account, often you can link the two so the MMA provides you with automatic overdraft protection. This means your institution can pull funds from your MMA if your checking account doesn't have enough money to cover a transaction. You'll want to find out ahead of time, though, if these count toward any transaction limits for the money market account.

MMAs have a lot to offer, particularly when interest rates are rising. Other financial options potentially do as well. Here are the top similarities and differences between MMAs and other accounts:

Checking accounts aren't designed for saving in the same way as MMAs. They're more for paying bills and covering day-to-day expenses.

Similarities to money market accounts:

• Both offer liquidity.
• Both may offer checks and debit cards.
• Both are federally insured.

Differences from money market accounts:

• Most checking accounts don't earn interest, although there are interest-bearing checking accounts.
• Checking accounts usually have unlimited withdrawals while MMAs may have restrictions.

Savings accounts share some fundamental features with MMAs but generally offer easier accessibility to funds with the tradeoff being a lower interest rate.

Similarities to money market accounts:

• Both offer liquidity.
• Both earn interest, usually at competitive rates.
• Both are good for short-term savings goals.
• Both are federally insured.

Differences from money market accounts:

• Most savings accounts don't offer checks or debit cards.
• Savings accounts commonly have lower minimum balance requirements than MMAs.
• Basic savings accounts typically earn lower returns.

CDs are an interest-bearing way to save money, but they only stay open for a specific term, such as six months or five years.

Similarities to money market accounts:

• Both earn interest, usually at competitive rates.
• Both are good choices for short-term savings goals.
• Both are federally insured.

Differences from money market accounts:

• CDs have a fixed rate of return for the length of the term while rates for MMAs can fluctuate.
• CDs have an end date, or maturity date.
• Money in a CD is less liquid; financial institutions often charge a fee if you withdraw any money before the CD matures.
• With CDs, you usually can't add more money during the term.

Money market mutual funds are distinctly different products. Money market mutual funds are investments made by purchasing shares in certain short-term market securities that pay dividends to the shareholder.

Similarities to money market accounts:

• Both offer a competitive rate of return, though in very different ways.
• Both are considered low-risk.
• Both may have withdrawal limits.
• Both offer liquidity, although money market mutual funds may not be retrievable until the next business day.
• Both are good choices for short-term savings goals.

Differences from money market accounts:

• Money market mutual funds are an investment in the market—they're not a banking product.
• The earnings gained from a money market mutual fund are from dividends rather than interest.
• You aren't guaranteed to gain a return in a money market mutual fund, and you can lose principal.
• Money market mutual funds are not insured by the FDIC.

An MMA is worth considering if you want a safe place to keep money for a short-term goal and earn a bit of interest. It won't produce the kinds of returns needed to build a robust nest egg, but it can help you do more with your money than parking it in a checking or low-interest savings account.

Interested in opening a money market account? Explore options from Thrivent Credit Union.