A money market account is a savings instrument that is similar to what you’d receive with a traditional savings account. It comes with some checking features that may include a debit card or checks so that you can access your money on a limited basis each month. Most offer a competitive interest rate in exchange for meeting a balance requirement or a minimum deposit amount.
As with other banking accounts in the United States, money market accounts receive insurance through the Federal Deposit Insurance Corporation (FDIC) at banks or the National Credit Union Administration (NCUA) at credit unions. That means you won’t lose the entirety of your deposit, even if your financial institution goes out of business for any reason.
With interest rates continuing to be at historic lows, a review of the money market account advantages and disadvantages is worth considering if you are looking for ways to improve the returns you can earn.
List of the Advantages of a Money Market Account
1. You have more access to your money than in other savings options.
If you were to put your money into a certificate of deposit, then it would get locked away for a predetermined amount of time. Should you need that cash for any reason, then you would end up paying a penalty on that amount – a figure that could even represent a loss of principal. Although the returns are not significant with a money market account, you’ll receive a higher APY in most situations than with a standard savings account while having limited access to your balance each month.
Most allow you to take cash out from your local branch. Writing checks is also a possibility, and some jumbo accounts may let you use a debit card up to the maximum number of allowable withdrawals.
2. Some money market accounts provide a significant return.
Although the average APY for a money market account is fairly low, there are some notable exceptions to consider. If you have $5,000 that you can put into this option at BMO Harris, then you can earn an APY of 1.95%. UFB Direct offers a 1.9% APY if you have a $25,000 minimum deposit available. Several other providers are currently giving rates in the 1.75% range.
NerdWallet ranks the best choice for 2020 as the CIT Bank Money Market Account. It offers a 1.85% APY with only a $100 minimum balance. Even if you don’t put your money into one of these recommended places, most local institutions provide a boost of 0.003% or more when you shift from a standard savings account to a money market account.
3. It’s a safe place to stash your cash.
Individual money market accounts receive up to $250,000 of insurance protection in the United States. That means your account will remain safe, even if your financial institution goes out of business for any reason. When you need a place to park your money outside of the risk of market exposure, this option gives you a way to still experience some growth without an issue of loss to consider.
The limited access that you receive with this account is what creates the higher interest rates that become available. It isn’t an investment option in 2020 because the rate of inflation usually beats the return of a money market account, but this choice can preserve your savings.
4. You begin to earn interest on your balance immediately.
Financial institutions compound interest monthly on traditional savings and checking accounts. If you decide to put your cash into a money market account, then this process happens every day. Even if you close your account before receiving a payment distribution, the bank or credit union will still provide what you earned until the moment you updated the balance. That’s why the returns can be a lot higher for some households.
The exchange for this advantage is that you may have fees and administrative costs to pay. Most savings accounts and many checking accounts don’t have these expenses to pay today.
5. It allows you to save for medium- or long-term goals.
If you know that you won’t need your cash right away, then a money market account can make a lot of sense. The higher interest rates and restricted access can be a combination that helps you to earn more over a longer time when compared to a standard savings account. That means you can keep building your balance higher as you approach a goal of going on a dream vacation or saving up enough for a down payment on your house.
You can also use a money market account in combination with other investment options to build income ladders and lower portfolio risks. Your financial advisor can let you know what to expect with your current setup and how to improve it.
6. You won’t lose your money as often when using this option.
The only way that you can lose value with a money market account is by not following the terms and conditions set by your financial institution. The most common reason why individuals see a reduction of cash is that they failed to meet the minimum account balance. A majority of banks and credit unions will automatically transition a money market account to a standard savings account as a way to help you avoid ongoing fees and costs in this situation.
Because your money doesn’t receive risk exposure to the market, there is almost zero risk involved. That means you won’t earn much in interest, but it also stops you from losing all of your value.
7. Brokerage accounts can access your money market account when you link them.
Some financial institutions provide the option to connect a money market account to a brokerage account. This advantage gives you an opportunity to purchase stocks, bonds, and treasuries with the cash you are saving. The transaction limits will still apply when you make these purchases, but it can also be an easy way to encourage a higher overall return.
You will want to review the terms and conditions of your money market account to see if this advantage is possible. Then speak with your financial advisor to discuss what investments make sense with this nest egg.
8. A money market account can sometimes work with property investments.
If you own real estate and work with a property management agency or as an independent landlord, then you may have the option to link your money market account to your property investments. That means you will receive the insurance coverage from the FDIC or NCUA on the figure you are own while still having access to your cash when needed. This advantage is one of the ways that some investors beat the rate of inflation while keeping their risk levels as low as possible.
9. Some financial institutions don’t require a high minimum balance.
Some families decide to avoid a money market account because the minimum balance requirements can be as high as $25,000 for basic services. A jumbo account typically requires $100,000. The average household in the United States doesn’t have access to that kind of money. That’s why several financial institutions changed the minimum balance requirement for this option.
You can find some minimum balances as low as $1. Most providers institution a minimum threshold at $250. That makes it a lot easier for some families to make their money start working for them more.
10. Transactions through money market accounts receive same-day consideration.
When you have a money market account at a local bank or credit union, then you have immediate access to your funds if you need them. You can also deposit money into the account to have it start earning interest right away. Unless you initiate the transaction on a weekend or during the overnight hours, you’ll receive same-day consideration for your settlement.
It’s up to the individual institutions to create policies that describe the exact timing of this advantage. Some banks and credit unions might require a one business day delay for reasons unique to their organization. When you know that you might need fast access to cash in an emergency, a money market account provides lots of advantages to consider.
List of the Disadvantages of a Money Market Account
1. Most financial institutions pay an interest rate that similar to a traditional savings account.
The average interest rate in the United States on a savings account stood at 0.09% in January 2020. That APY applies to the average account and jumbo deposits, defined as an account with a balance of over $100,000. The average money market rates for Americans fall somewhere between 0.08% and 0.11%, depending on what your account balance is at the moment of issuing interest.
That means the interest rates you receive are almost the same (and they could be less) than what you’d get with a standard savings account. It may not be worth trying to meet the required minimums to switch your money into that vehicle.
2. You can only access your money a limited number of times each month.
The U.S. government directly restricts the number of times you can access your balance in a money market account each month. The Federal Reserve Board permits a credit transfer or withdrawal a maximum of six times per month, and some institutions voluntarily lower that figure to only three contact points monthly. These regulations make the account less suitable for daily use as a traditional checking account.
It’s more flexible than a certificate of deposit because of the lower levels of access, but it still puts some restrictions on how you manage your money. Once you hit the predetermined number of allowable transactions, then you’re no longer permitted to access your cash in the money market account until the next month comes along.
3. Protections only go up to the maximum FDIC or NCUA amount.
The insurance coverage provided by the FDIC and NCUA on money market accounts goes up to $250,000. That means you have a safe investment up until that amount. If you need to put more money away than that, then you must either choose a different instrument or another institution. This disadvantage limits either the amount you receive if your banking provider goes out of business or the amount of interest you can earn since you might choose to work with a different provider.
4. The minimum balance stipulation can be problematic for some households.
Having a high minimum balance in your money market account can be a significant obstacle when you live paycheck-to-paycheck. This disadvantage can even cost you in lower returns and additional fees if something unexpected happens to your financial situation. Although some providers have a minimum balance requirement of just one dollar, the average amount you need to put into this account in the United States is $2,500.
If your current balance doesn’t meet the required minimum, then you might be subject to fees and other costs that deteriorate your financial situation. That’s why it may be a better option to stick with a savings account if you have less than $2,500 to save away right now.
5. The interest rate will usually fluctuate on a money market account.
The Interest rate that you receive with a money market account is variable. It will fluctuate based on the changes that happen with the overall market interest rates. Banks, credit unions, and other depository institutions offering these accounts establish fees for maintenance and transactions that cover the shifting circumstances so that your returns aren’t as predictable as they might seem to be on the surface.
You must also be aware of the advertisement for introductory rates when opening a money market account. Anything that promises more than 1.5% APY could be a problem for you once you get outside of the promo rate. Always check the terms and conditions of your account before agreeing to deposit money to avoid this disadvantage.
6. Your overall monetary value will go down each year.
The rate of inflation for the United States in 2019 was 2.3%. This figure was boosted by an increase in food prices and the range of other supplies while energy costs experienced a decrease. If you want your money to grow, then the value of a money market account becomes questionable. Using the average APY in the U.S., the value in an account went down by 2.2% for the year. Only a handful of institutions were providing an interest rate that could beat the rate of inflation for the year.
Although that figure doesn’t sound like a lot, it is an amount that can add up quickly. If you took the maximum insured amount, you’d lose over $5,000 in spending power on your $250,000 deposit.
7. It is up to the consumer to determine if their money market account is insured.
The rise of non-traditional banking options has led to the offering of some money market accounts outside of banks and credit unions. Companies like Credit Karma and T-Mobile give you ways to save some cash. These alternative solutions might provide higher APYs or other benefits, but you might also lose the insurance coverage from the FDIC or NCUA if you move your money into one of them.
Some investment accounts that work like a money market account don’t receive this protection either. You’ll want to verify in the terms and conditions before making a deposit that you receive the correct level of protection that your finances require.
8. You must pay taxes on the interest payments received.
The interest that you receive on a money market account counts as income for the current tax year. Your financial institution will send you documents that detail the total amount paid to have access to these funds. The final amount that you owe depends on how much you earned and your current income bracket. Some investors might find that the cost of earning these funds wipes out the small gains that their accounts earned over the year.
If you fail to pay taxes on this interest, then fines and penalties may apply – even if the amount is small.
9. Violating the terms and conditions of the account may forfeit your interest earnings.
When you accidentally or purposely violate the terms and conditions of a money market account, then you might lose all of your interest earnings for the year. If the bank or credit union takes that amount out and it reduces your balance below the minimum threshold, then you’ll need to restore it or face an involuntary switch back to a standard savings account. Some institutions make this change immediately.
A money market account is a useful tool to use when you have medium-term financial goals to reach. It won’t provide the same potential for long-term goals as stocks or bonds, but it does provide a slightly higher APY than a standard savings account for most households. You can also use this account to fund your larger, more infrequent expenses. Some families even use it to pay their mortgage costs each month.
It does not function like a checking account, so a money market option is not the best choice for someone who requires daily transactions.
The advantages and disadvantages of a money market account are essential to review if you have at least $5,000 in savings that remains relatively untouched. Today’s low-interest rates aren’t going to help that money grow, so this option can preserve your access will helping you to earn a little on the side.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.