What Is A Money Market Account?

If you visit your local bank, you might advertisements for money market accounts. You might be familiar with CDs, checking and savings accounts, but money market probably sounds fancy and exotic. Fortunately, they’re not.

I think of money market accounts as a hybrid between a savings account and a checking account. They give you a higher interest rate than a checking account with the ability to write three to six checks a month. They usually will have higher minimum balance requirements and restrict the number of withdrawals per month. They are like a lower interest rated savings account with checkwriting previlieges. They are FDIC insured, principal protected, and give you the best of both worlds.

Money market accounts were really popular before the rise of online savings accounts and electronic transfer of funds. In the past, if you had a savings and checking, you would have to visit a branch to transfer funds between the two. It was more convenient to use a money market account to write checks than go to a branch, transfer money from savings to checking, and then write a check.

Nowadays, I don’t see much value in money market accounts but they sure were popular in the 80’s.

Do you have a money market account? If so, can you name any other benefits or drawbacks to them over alternatives?

Jim writes about money matters at his personal finance blog Bargaineering.com.

Photo: armydre2008)

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  1. shinseiromeo says:

    I used to years ago, around 2006. Paypal had a 5.25% interest rate. I kept $20,000 in it but then the banking crash happened, and the rates dropped to 2% and below. I ended up taking the money out and put it elsewhere.

    • ApupnamedShamus says:

      @shinseiromeo:

      You trusted PayPal with $20,000???? Wow. I wouldn’t trust leaving $20 in my account for more than a week.

      • AdvocatesDevil says:

        @ApupnamedShamus: Yeah, that’s a REALLY, really scary thought. I don’t leave ANYTHING in there and I hate that they have access to any of my accounts, but sometimes for me work PayPal is simply the only way to handle a transaction.

  2. nwaasob says:

    I’ve got one with my bank. The interest rate is higher than a savings account and I get more perks from the bank just for having the account. It makes it worthwhile.

    • Nytmare says:

      @nwaasob: Same with my credit union, the money market account pays (payed) far more interest than savings and checking. This does not jibe with the original post.

      For a while it was a good way to hold the bulk of your savings that you hadn’t otherwise invested. But with interest rates so low now, it’s hardly worthwhile.

      I have not figured out the point of having money split 3 ways into savings, checking, money management, but I guess you have to play their little games if you want to earn interest while being able to write checks.

  3. sonneillon says:

    I used a money market account for a while because it had a higher interest rate on an account I used to write my rent check. As far as I can tell the money market account I used had higher yields than other checking accounts and the company I worked for did not have direct deposit so I needed brick and mortar.

  4. Richardsonke says:

    I like my Discover Bank money market account because it (used to) pay excellent interest while still being almost 100% liquid (minus check cashing/wire transfer time). The interest rate used to be great, but even with the poor market, it is still almost as high as a 1 year or so CD. I don’t like to lock my money up in CDs in case I need it and there are no fees as long as you keep it above the minimum balance. Overall, I think that if you have more than a couple thousand dollars in a standard savings/checking account, you are wasting money because a money market account can give you much better interest return while still being 100% safe and liquid, particularly once interest rates go back up.

  5. Eyebrows McGee (now with double the baby!) says:

    I have a high-interest money market account that’s FDIC insured. I keep my emergency fund stashed there. I know I could do better, but it’s my emergency fund. :)

  6. gStein_*|bringing starpipe back|* says:

    yeah, i have 2 accounts – Checking and money market. the money market has a higher interest rate than a savings account at Bank of America

  7. r386 says:

    I have a money market account at the moment, just used it to store money in until CD-rates improve so I am earning some interest, but this way I can buy in when they get better

  8. KnightoftheVoid says:

    I wouldn’t really say best of both worlds. I know that some credit unions (like the one I work at) offer interest bearing checking accounts. There is no limit on transactions / checks written, no minimum balance, no monthly or yearly fees (unless you write your account into an NSF), and it also refunds unlimited ATM fees as long as each individual fee is under $6 (so unless you’re using casino ATMs, no problem). In exchange, most CUs / banks will ask you to do things like have a direct deposit going to the account, or do a certain number of transaction with your debit card per month.

    • Bargaineering.com says:

      @KnightoftheVoid: Ah, I didn’t know that, thanks for letting me know. In that case, the interest bearing checking account is better than a money market, but compared to standard versions of both, I still think it’s the best of both worlds?

  9. lmarconi says:

    i used to have a money market account but i switched to a high interest savings account with ING and I think it’s a lot less complicated/more convenient : )

  10. huadpe says:

    NOT ALL MONEY MARKET ACCOUNTS ARE FDIC INSURED.

    Sorry for the caps, but this is really important. There are two financial products that are called “money market” accounts. One is a type of high interest bank account that is FDIC insured. The other one is a “money market mutual fund.” These are -not- insured by the FDIC. They can (but almost never do) lose money. In fact, what caused much of the financial crisis of October, 2008 was the failure of a money market mutual fund, which caused a massive panic and bank run.

  11. gertymac says:

    We keep our emergency fund in an FDIC insured money market account with our credit union. It’s linked directly to our checking accounts and mortgage so transfers are almost instant and the interest rate is in the same ball park as an online savings acct.

  12. EarlNowak says:

    The correct distinction is “Money Market Deposit Account”, according to the FDIC. A MMDA is FDIC insured if held through a bank. A Money Market Fund is not.

  13. Segador says:

    My USAA money market account is paying 5% right now.

  14. Professional_Iceberg_Hunter says:

    I just turned 18 and I am looking into applying for credit cards to build up my score. However, I don’t know how to apply! My parents tell me I should start with a gas card and then work my way up from there. Do I just wait till I get an offer or do I go to the gas station and apply for one there? Any tips?

    • wcnghj says:

      @Professional_Iceberg_Hunter: Start with a macys store card applied for in the store.

      Always pay your balance in full each month. After six months, try an issuer like capital one or Discover if you’re in college.

    • gatewaytoheaven says:

      @Professional_Iceberg_Hunter: Store card as the first card? How about a student credit card? I got my first one from US Bank with a $500 credit limit. Mind you, this was a complete unsecured card, and the only difference between my student card and a regular card was a higher APR and a lower initial credit limit.

  15. CompyPaq says:

    I have a Capital One Direct money market. It was nice because I didn’t have a checking account when I opened it and needed some way to write checks. It was also paying 5%. Now its down at 1.25%.

  16. mannyv says:

    Specifically, a money market account uses your money to invest in short-term commercial paper or some other ultra-liquid investments. There’s some risk involved, which is why there’s a higher interest rate.

    There wasn’t any real risk until recently. Google for “breaking the buck” to see what happened.

  17. duffbeer703 says:

    Money market accounts typically give you interest rates that are the same or better as a savings account, but without the rules associated with savings. Savings accounts prohibit more than 6 outgoing withdrawals or transfers in a 4-week period.

    With the money market, you lose that restriction, and often gain other features as well. For example, many institutions will allow you to configure customized “sweeps” of money market accounts.

  18. meadandale says:

    My money market accounts are still paying WAY higher interest than any of my checking or savings accounts and are just as liquid.

  19. arguewithme says:

    I was hoping this article would explain how money market accounts earn interest differently than savings/checking accounts. anyone?

  20. Bobspamming says:

    Let’s be clear here. A money market savings account is one thing, and a money market FUND is another.

    First, a money market savings may be FDIC OR NCUA insured depending on if it is held at a bank or a credit union.

    A money market FUND is not FDIC or NCUA insured but is usually backed by the issuer to not lose any principal value.

    The big difference is that a money market savings is just a high yield savings but a money market fund is actually an investment product. (hence the one being federally insured and the other not)