Pros and cons of money market accounts

Advantages of money market accounts

Money market accounts These are interest-accumulating accounts that you can open at a price Bank or credit union. What sets these accounts apart from other savings accounts is that they generally pay higher interest rates, which can benefit those with short-term savings goals.

1. Money market accounts offer competitive APYs

The most important advantage of money market accounts is that they offer high annual returns (APY). While the exact amount of interest you earn will depend on several factors — such as how much money is in the account and which bank you open your account with — they generally pay higher interest rates than traditional savings accounts.

This is an attractive option because we are currently at a unique point in the economy where savings account returns are higher than they have been in years due to… High interest rates.

“At a high level, money market funds are generally a better option than just sitting in a checking or savings account because they actually deliver higher returns,” says Matt Kokanda, a certified financial planner at CI BDF Private Wealth, a private wealth management firm. In Itasca, Illinois.

While money market accounts are great for keeping and managing your money, it's important to remember that a money market account is not considered an investment vehicle, and to build a long-term investment portfolio, consider opening a retirement account such as a 401(k) or Roth IRA.

2. Easy access to your funds

What makes money market accounts different from high-yield savings accounts is that the accounts offer features of both savings accounts and checking accounts. Like checking accounts, they often come with debit cards and check-writing capabilities.

Many banks offer debit cards to money market account holders, allowing users to make ATM withdrawals and transfers and pay for goods with their debit card. Users can also often write checks against their account balances.

Since these accounts offer high interest rates with easy access, they are better suited for people Save money in the short term.

“These accounts are really good for meeting your cash needs that you'll need in the next couple of months. For example, tax bills are coming up and these are great places to keep your tax money,” Kokanda says.

3. Your money is protected

Another feature that makes money market accounts attractive is that they are insured. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insure up to $250,000 in a money market account, so you can be confident that you won't lose money if the bank you use fails.

“I've seen people open multiple money market accounts so they can still get a higher interest rate, but also keep the FDIC insurance that may come with the equivalent of just staying in a checking or savings account,” Chloe Wohlforth explains. Certified financial planner from Angeles Wealth Management, a multi-asset investment firm.

However, money market mutual funds, offered by stock brokers, are not federally insured. Not all banks are FDIC insured, so be sure to confirm this before signing up for an account.

Disadvantages of money market accounts

While money market accounts are a great option for short-term saving, they have limitations that potential users should consider.

1. Depending on your bank, there may be withdrawal limits

Many banks have withdrawal limits on how much you can withdraw from your money market account and how often.

“Many withdrawal restrictions[restrict you to withdrawing]more than six times a month, so it's a different situation than someone who relies on using their debit card more often for a regular checking account,” says Kokanda.

The Fed previously required banks and credit unions to limit withdrawals to six per month; However, they reversed this policy in April 2020. It is important to check with your bank or credit union to see if the policy is still in effect.

2. Many accounts have monthly fees

Another drawback to remember is that although money market accounts have high returns, they can also come with onerous fees. Many banks and credit unions will charge a monthly fee just to maintain your account. Other banks can charge fees for not maintaining a high enough balance or exceeding the withdrawal limit. Excessive transaction and overdraft fees range from $10 to $25.

3. Your account may require a minimum balance

To open a money market account, you'll typically need to achieve a minimum balance, depending on your bank or credit union. So, if you're saving slowly and starting with a low balance, an alternative savings account may be a better option until you can meet the minimum balance requirements. Minimum balance requirements can range from $100 to $2,000, but there are money market accounts available that do not have minimum balance requirements.

Also, although these accounts have no maximum balance limits, it is important to remember that the insurance only covers $250,000, so any amount more than that in the account is not fully insured. There's nothing stopping you from having different accounts at different banks, as both the FDIC and NCUA cover up to $250,000 per depositor, per insured bank, per account ownership class.

Ready meals

Money market accounts are a great option if you're looking to maximize the amount of interest you can earn in a low-risk environment. You'll have easy access to your funds, and your account is insured for up to $250,000, which is a great financial tool to help you achieve your short-term savings goals.

However, if you're starting with a relatively small amount and are concerned about the cost of fees that may erode the interest earned, you may want to consider money market account alternatives.

Frequently asked questions