The term ‘money market account’ (MMA) refers to an interest-bearing account offered by banks and credit unions. Often known as Money Market Deposit Accounts (MMDA), these accounts blend the features of both savings and checking accounts. With MMAs, you’ll typically enjoy higher interest rates than standard savings accounts along with conveniences like check-writing and debit card access. However, they may include certain restrictions preferable for short-term goals, unlike traditional checking accounts.
Key Takeaways
- Money market accounts provide the features of savings and checking accounts combined.
- They generally offer higher interest rates than regular savings accounts.
- Suitable for short-term financial goals rather than long-term planning like retirement.
- May include check-writing and debit card privileges but often come with restrictions.
- Alternatives include high-yield savings accounts and certificates of deposit.
How Money Market Accounts (MMAs) Work
Money market accounts offer a compelling mix of benefits similar to both savings and checking accounts:
- Interest: Expect higher interest rates than traditional savings accounts, albeit variable based on market trends.
- Debit Cards: Often come with debit cards for ATM access for deposits, withdrawals, and transfers.
- Check-Writing: Enjoy limited check-writing capabilities.
To open an MMA, a minimum initial deposit might be required, and maintaining a minimum balance is often essential to avoid service charges. Ideal for short-term savings goals, MMAs are perfect for specific purchases, like vacations or emergency funds, but not suitable for long-term investments like retirement plans.
The Evolution of Money Market Accounts
Prior to the early 1980s, the federal government limited interest rates that banks could offer on savings accounts. In response to competition from money market mutual funds, the Garn-St. Germain Depository Institutions Act of 1982 allowed banks to offer higher yielding money market accounts.
Advantages and Disadvantages of Money Market Accounts
Pros:
- Higher interest rates
- Limited check-writing privileges
- Debit card access
- Federal insurance protection up to $250,000 (FDIC for banks, NCUA for credit unions)
Cons:
- Restricted number of transactions
- Monthly fees and minimum balance requirements
If you need to insure more than $250,000, consider opening accounts at multiple institutions.
Comparing MMAs to Other Accounts
Money Market Accounts vs. Savings Accounts
- MMAs offer higher interest rates: Average rates in 2022 were 0.08%, compared to savings account’s 0.07%.
- Interest rates rise or fall with inflation, affecting your return based on how it’s compounded.
- MMAs provide some check-writing capabilities and debit card access; high-yield savings lack these features.
- Look at overall interest and rules to pick the best fit.
Money Market Accounts vs. Checking Accounts
- Unlimited deposits and some MMA provide debit cards and check-writing capabilities.
- Federal Reserve lifted transaction limits under Regulation D in April 2020, but some banks may maintain restrictions.
Comparing MMAs and Money Market Mutual Funds
Unlike MMAs, money market mutual funds are not insured but invest in safe, short-term assets. They might offer higher returns but come with specific withdrawal limits.
| Feature | Money Market Account | Savings Account | Checking Account | CD | Money Market Mutual Fund |
|---|---|---|---|---|---|
| Interest Rate | Variable | Variable | Varies | Fixed | Variable |
| Federal Insurance | Yes | Yes | Yes | Yes | No |
| Checks | Limited | No | Unlimited | No | Limited |
| Debit Card | Yes | No | Yes | No | Sometimes |
Note: Always compare the terms and interest rates directly from financial institutions.
Exploring Alternatives to Money Market Accounts (MMAs)
Passbook Savings Accounts
Unlike MMAs, don’t require initial deposits or minimum balances. They are FDIC- or NCUA-insured but offer lower interest rates and fewer restrictions.
High-Yield Savings Accounts
Higher rates but may require direct deposits. Often FDIC- or NCUA-insured and can sometimes rival MMAs.
Regular Checking Accounts
Unlimited transactions with FDIC or NCUA insurance. However, they often have very low interest rates.
High-Yield Checking Accounts
Offer interest rates that can exceed those of MMAs but may come with more requirements and caps.
Rewards Checking Account
Sign-up bonuses and additional rewards come with stricter rules and potential high fees.
Certificates of Deposit (CDs)
Higher interest rates for locking deposits over a fixed term but penalize early withdrawals. No provision for check-writing or debit card usage.
Key FAQs
Are Money Market Accounts Safe?
MMAs at banks are FDIC-insured up to $250,000 per depositor per bank, with joint accounts covering $500,000. To ensure coverage beyond $250,000, spread deposits across multiple banks.
What Are the Benefits of Money Market Accounts?
Higher interest rates, insurance protection, easy fund access, and the blend of check-writing and debit card functionalities characterize MMAs. They stand out by enabling investments in CDs and commercial paper, which regular savings accounts demur from doing.
What Are the Disadvantages of MMAs?
Limitations on monthly transactions, fees, withdrawal restrictions, and balance requirements may detract from the benefits. Be diligent about the specific rules of your bank to maximize your MMA’s advantages.
Related Terms: money market deposit accounts, high-yield savings accounts, certificates of deposit, tangible net worth.
References
- Federal Reserve History. “Garn-St Germain Depository Institutions Act of 1982”.
- U.S. Securities and Exchange Commission. “Money Market Fund”.
- Federal Deposit Insurance Corporation. “Are My Deposit Accounts Insured by the FDIC?”
- Federal Deposit Insurance Corporation. “Your Insured Deposits”.
- National Credit Union Administration. “How Your Accounts Are Federally Insured”.
- Federal Deposit Insurance Corporation. “National Rates and Rate Caps”.
- Federal Reserve System. “Regulation D Reserve Requirements”, Pages 3-4.
- Federal Register. “Regulation D: Reserve Requirements of Depository Institutions”.
- Federal Deposit Insurance Corporation. “Financial Institution Employee’s Guide to Deposit Insurance”.
