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No matter what’s going on in the world, saving money for the future should be a top priority. But with all the options out there, finding the best place to park your excess funds can seem a little confusing—or even overwhelming.
What if there were an account option that offered a higher interest rate than traditional accounts but still gave you the ability to withdraw money—on a limited basis—without a penalty? That’s a money market account.
In this article, we’ll explain what a money market account is, how it works, how it compares to other types of accounts, and give you the pros and cons.
If you are looking for an account to manage your different currencies, you might want to take a look at Wise. Wise is a Money Service Business that offers the Wise account and card. With Wise account you can hold up to 40+ currencies and while you won't be earning interest on these funds, you can save up to 3x on fees when sending money abroad.
|📝 Table of contents|
Money market accounts—or money market deposit accounts—are another account option offered by most banks and credit unions. But they have some additional perks over traditional savings and checking accounts that make them unique.
Generally, money market accounts offer higher interest rate payouts than regular savings accounts. Plus, you have the benefit of being able to write a limited number of checks every month. Some banks even offer a debit card.
And because these accounts are opened through a bank, they’re fully insured up to $250,000 by the FDIC.¹
However, like anything that gives a higher interest rate, there are some catches that make them less versatile than a regular savings account.
Everyone wants a good return for parking their money somewhere. The biggest positive with a money market account is the higher interest rate. But the beauty of these types of accounts is that they allow you to write checks or use a debit card as well, which you can’t do with a regular savings account.
Next, money market accounts are fully insured by the Federal Deposit Insurance Corporation—FDIC. The FDIC is a government agency that provides insurance for many types of bank accounts in case the bank goes under.
If you’re a member of a credit union then the National Credit Union Administration—NCUA—provides the same levels of protection for your accounts.²
Also, it’s important to note that the FDIC insures up to $250,000 per depositor and not per account. So each account goes toward the insurance limit. Joint accounts have $500,000 in coverage.³
|💡 If you have funds in several currencies that you'd like to add to your money market account, it's a good idea to use a Wise account to convert them first. There are no mark-ups and hidden fees and you'll always get the mid-market rate, so you can save more money.|
As stated, because of higher interest rates, there are a few catches to money market accounts.
Financial institutions typically require a higher minimum deposit to open a money market account. And banks and credit unions also may have high minimum balance requirements. It’s an incentive for you to not touch the money and opens the account up to higher interest rates.
And although you can write checks and possibly use a debit card with the account, there’s usually a limit on the number of transactions per month.
Banks consider a transaction as an electronic withdrawal, wire transfer, writing a check, or using your debit card. But you’ll still have the ability to withdraw cash from a teller or at an ATM.
With money market accounts defined and the pros and cons laid out, let’s compare and contrast some alternatives.
Banks attract people to money market accounts by offering higher interest rates over standard savings accounts. As of May 2021, their average interest rate was 0.06% while the average savings account rate was 0.04%. And the highest money market rate offered was 1.29% while the highest savings account rate was 0.75%.⁴
Money market accounts will usually offer a higher rate by at least a point or two because they can invest in other securities like unsecured debts, government securities, and certificates of deposits—CDs. Savings accounts legally can’t do this.
However, money market interest rates are variable, which means they’ll go up and down with inflation. So look into how the interest on your money market account compounds. Is it daily, monthly, or annually? That factor can have a huge impact on the amount of money you’ll get in return—especially if you’re working with large sums of money!
The last difference between money market accounts and savings accounts is the ability to write checks or use a debit card. Money market accounts offer these privileges—usually on a limited basis—whereas savings accounts do not.
|💡 It’s a good idea to check the rates before making a decision on where to put your money because interest rates fluctuate. For example, in the decades before The Great Recession of 2008 there was a wider gap between the rates offered by the two types of accounts.|
One of the biggest negatives with money market accounts—when compared to a check account—is that the Federal Reserve limits the account to six transfers and electronic payments each month.⁵ Transfers in this case include:
- Phone transfers
- Wire transfers
- Electronic transfers
- Debit card payments
- ACH transactions
- Pre-authorized transfers—that includes overdrafts!
If you exceed these limits you could be fined by your financial institution. If you continue to break the rules, then the bank may put a stop on your transfer abilities, move your money to another account or just close the account altogether.
However, the Federal Reserve does allow you to make unlimited transfers in person through a bank teller or by mail, ATM, or messenger. Deposits are unlimited with a money market account.
A point of confusion for some is between a money market deposit account and a money market mutual fund—sometimes shortened to ‘money market fund’. They’re not the same thing!
Money market mutual funds are not deposit accounts. They’re investment funds offered by investment firms. With a mutual fund, investors have the ability to buy and sell shares in funds that invest in cash and other debt-based assets.
The FDIC does not insure money market mutual funds, so be aware of the risks before investing.
In the table below, you can compare the interest rate variables and advantages of some common account types.
|Money Market Account||Variable|
|Money Market Mutual Fund||Variable|
The accounts above are key types of accounts people compare to money markets, but financial institutions offer a variety of other accounts. Some accounts may offer features and rates that can compete or surpass the viability of a money market account for your needs.
Always explore all of your options before making a decision.
High-Yield Savings Accounts
Depending on where you deposit, how much you’re depositing, and the state of the market, high-yield savings accounts might offer a higher interest rate than a money market account.
These types of accounts are through a bank or credit union so they’re insured by the FDIC or NCUA. But they sometimes have more rules and restrictions like requiring monthly direct deposits.
High-Yield Checking Accounts
High-yield checking accounts are like high-yield savings accounts in that they might offer rates that match or surpass a money market account. But they also come with a lot of restrictions too.
Banks may require monthly direct deposits, a minimum number of transactions. And often, they'll set a cap—around $5,000—where the higher interest rate doesn’t apply.
However, you do have the same features as a regular checking account in that you can write unlimited checks or use your debit card as many times as you want.
The accounts are insured by the FDIC, but carefully read the terms and conditions before depositing.
Rewards Checking Account
Some accounts offer perks in lieu of higher interest rates to attract customers. With a rewards checking account a bank could offer things like:
- Sign-up bonuses
- Reimbursed ATM fees
- Airline miles
- Cashback rewards
These accounts also come with a lot of rules like high-yield accounts, but they’re insured by the FDIC or the NCUA and function like a regular checking account.
Certificates of Deposit
Certificates of deposit act like regular savings accounts except they have a fixed timeframe where you can’t touch the money without a penalty. Banks offer many time frames ranging from three, to six, or nine months or even a year or many years.
Based on how long you’re willing to keep the money in one place, banks will increase the interest rates. But if you want to take the money early, be prepared to pay a penalty and receive a lower interest rate.
There are also liquid CDs that don’t penalize you with a fee for taking money out early, but you’ll still get a lower interest rate.
With CDs, you can’t touch the money without penalty, so there’s no check writing or debit card privileges. Also, you don’t have the ability to add money to the account. What you put in is what sets the interest rate, and the FDIC still insures the account.
This table shows some examples of money market accounts along with their annual percentage yield (APY) and minimum deposit.
|Capital One Bank||0.30%⁷||None⁷|
|First Internet Bank||0.50%⁸||$100⁸|
|Sallie Mae Bank||0.40%⁹||None⁹|
All rates confirmed on 5/21/2021
Yes. Again, the FDIC insures money market accounts.
The agency provides up to $250,000 of coverage per depositor, but not per account. The $250k includes all of your accounts with the same financial institution—checking, savings, CDs, etc.. If you want more insurance on your funds, then you’ll need to open more accounts at other financial institutions.
Opening a joint account adds another $250,000 in coverage.
No. Money market rates are variable. Before opening an account, check the rate at which the rate changes. It could be daily, monthly or annually.
The biggest advantage of opening a money market account is that it generally offers a higher interest rate than a traditional checking or savings account. Beyond the interest rate, you have the ability to write checks or use a debit card, and the account is insured by the FDIC for up to $250,000 for each depositor.
Because money market accounts offer a higher interest rate, banks may require a higher initial deposit and a minimum balance in the account as an incentive for you to keep the money in one place.
Also, there’s a limit on the number of transactions you can do in a month. If you break this rule, the bank might impose a fee, move your money to another account, or close the account.
- FDIC - Deposit Insurance
- NCUA - Share Insurance Fund Overview
- FDIC - Joint Accounts
- RateWatch - National Rate Trends Update 5/14/2021
- Federal Reserve Board - Regulation D
- Ally Bank -Money Market Account
- Capital One - 360 Money Market Account
- Ally Bank -Money Market Account
- First Internet Bank - Money Market and Savings Accounts
- Sallie Mae Bank -Money Market Account
- TIAA Bank - Yield Pledge Money Market Account
All sources checked on 27 May 2021
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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