A money market account provides a safe place to keep your money while enjoying a better interest rate than what a standard savings account offers. You can enjoy easy access to your cash, have the option to write checks or use a debit card, and still earn a higher rate on your deposits.
Most people enjoy the fact that a money market savings account combines the best features of a traditional checking and savings approach. Banks and credit unions both provide access to this option for their consumers in the United States. As with any financial decision, it is essential to review the advantages and disadvantages that are possible with this option.
Because interest rates are much lower today than they were when this banking option became available, the pros and cons of a money market savings account may be minimal for some consumers. When the rates are similar, the potential disadvantages have more influence on your decision.
List of the Pros of a Money Market Savings Account
1. It is a safe place to keep your money because the deposits are insured.
Anything that you deposit into a money market savings account receives protection because of FDIC or NCUA insurance. That typically means up to $250,000 in the account remains safe, even if the institution suffers a catastrophic and unexpected failure. Your money will not grow as fast as it could with investments like stocks, bonds, or mutual funds, but there is less overall risk associated with these accounts.
2. You can still access your money easily with a money market account.
Conservative financial products like CDs or bonds can sometimes lock your cash access away for several years at a time. If you do have the option to withdraw money, then a significant penalty may apply to the funds that you receive. The cost of an early withdrawal may be equal to or greater than the financial gains achieved. When you choose to use a money market account for your savings, then you have easier access to your cash.
Most money market accounts will let you write a check or take cash out from a teller when you need to have some extra money. Some institutions have begun to allow a debit card for purchases. When you add in this benefit with the increased returns, the structure of this financial tool is truly unique.
3. You will earn a higher interest rate on your account.
Although the interest rates are fairly low today, a money market account will still typically provide a better return for consumers when compared to a traditional savings approach. If you were to open this option with Capital One through their 360 Money Market account, then a minimum deposit of $10,000 would create an annual percentage yield of 1.5%. Most savings accounts at a bank or credit union would provide a return of less than 1%. If your daily balance is less than $10,000, then your annual percentage yield would be 0.6% in this example. Interest on the account is compounded and credited monthly.
4. You start earning interest on your deposits as soon as the next business day.
The traditional approach to banking would compound your interest monthly based on what the amount is in the account at that time. When you opt for a money market savings account, then your deposits begin to earn a return as soon as the next business day. If you end up closing the account before you receive the updated balance, then you would get whatever you were owed from the daily balance at that time.
If you were to make a deposit on a Sunday using a check, most institutions would process the funds the next day. That means you would begin to earn interest on the additional amount starting on Tuesday. If you place cash into the account, then it begins to earn interest on the day you complete the deposit.
5. You have flexibility in how you can manage your account.
Most banks and credit unions allow you to enjoy in-person and online options to manage your account. That means you can have fast access to your money by transferring it, taking cash out, or writing a check for a transaction. Some institutions will give you ATM access to make it even easier to get the cash you need. These numbers may still be limited to six per month depending on the rules of the institution you choose for the account, but you won’t need to worry about the fees like you would with a certificate of deposit.
6. You can’t lose your money in this type of savings account.
A money market savings account is a low-risk option to maintain a healthy balance for a variety of purposes. You will need to make sure that you meet the requirements of your bank or credit union to ensure that the value of your account remains static or has an opportunity to grow. If you consistently go over your monthly transaction limits or have the balance drop below the required minimum, then the fees associated with those actions can cause you to lose value in the account.
When you follow the terms and conditions of a money market savings account, then your bottom line is that you can leave with the amount you deposited and a small return on top of that.
7. There may not be a limit on the number of transfers you make.
Transfers are different than transactions when you are managing a money market savings account. If you have a traditional checking and savings account at the same institution where are you manage your money market funds, then you may have the option to transfer money between the two accounts more often than the 3-6 transactions you’re allowed when making withdrawals from the balance. This advantage means that you can still have the benefits of flexibility while still earning a better return.
8. You can connect a money market account to a brokerage account.
Some banks give you the option to connect your money market deposit account to your brokerage account so that it becomes possible to purchase stocks, treasuries, or bonds. You might have this choice with the savings feature, or you can use your six transaction limit each month to fund these investments. It all depends on what the terms and conditions of your account say when you go through the sign-up process. If you have any questions about making investments from your MMA, you’ll want to speak with the financial advisor who is helping you through the initial steps.
9. Some money market accounts can link to property investments.
The FDIC insurance money market savings accounts up to $250,000. This organization also reports that some accounts can be insured for a higher amount if you link them to specific property investments. Since there are no fees attached to the checks written on this account, you have an effective way to maintain the value of your net worth without being so conservative that you’re sticking your cash in something with virtually zero interest.
This advantage is one of the easiest ways to manage the problems that inflation can cause when interest rates stay persistently low.
10. Some institutions don’t have minimum balances for a money market account.
If you are not sure that you can meet the minimum balance requirement for a money market savings account, then it might be worthwhile to speak with a representative at a local credit union. Many of these institutions have smaller minimum deposit requirements to open the account, with some of them being as low as $250. They come with the advantage of carrying no service charge fees, and there are often no minimum withdrawal requirements.
Compare that benefit to a money market savings account held at Bank of America, where is the minimum deposit required to avoid fees or penalties is $5,000. Then you get to take advantage of all of the other benefits that come with this financial tool.
11. You can receive a same-day settlement for your transactions.
The money market savings accounts that you find out banks and credit unions are liquid. That means you can add or take money away from the accumulated pile of cash on the same day. If you were to use conservative investments at these institutions, such as a certificate of deposit or T-bills, then you may not receive this benefit. It depends ultimately on the policies of the bank or the brokerage firm that handles the transaction. If you need instant access to cash, you’ve got to take this benefit under consideration.
List of the Cons of a Money Market Savings Account
1. Higher minimum balances typically apply to the account.
Money market savings accounts have a lot of nice features and advantages to consider, but the primary drawback of having one is the requirement of a minimum balance. You typically need at least $2,500 to start the account in the first place. If you fall below the threshold, then you can expect to pay monthly fees that will quickly eat into whatever returns you could earn. Your financial institution might even have the authority to transition your account back into a traditional one, restricting the overall return you could earn.
2. Most money market accounts have transaction limits.
When you open a money market savings account in the United States, then you will have access to cash whenever you need it. Laws restrict the number of times that you can access your balance by using a check to only six per month. Some banks and credit unions will only allow you to write three checks or use a debit card for that number of transactions each month. That means it can be a challenge to pay your bills when all of your money is placed in the structures.
If you need flexible access to your money, then a money market savings account is not as useful as a traditional checking approach.
3. You might not earn as much in interest as you could with other conservative options.
Money market savings accounts are excellent options to consider when interest rates are high in the marketplace. When the highest offer is below 2%, then there are other conservative options for you to consider. If you use a series of CDs to start growing your money, which is called a “ladder,” then you can earn a decent return while keeping some liquidity available to use for emergencies. This approach also minimizes the risk of early withdrawal penalties impacting your results.
If your goal in reviewing the pros and cons of a money market savings account is to do some long-term investing, that you may want to speak with a financial planner about creating a mix of investments that will help you to reach your goals.
4. You will need to verify that your funds are insured.
When you decide that a money market savings account is your best option, then it is essential to use one from a bank or a credit union in the United States. That will ensure that your funds have the correct level of protection you need. Some beginners confuse these accounts with money market mutual funds, which have their own role in investment planning, but they are not the same financial tool.
Make sure that you ask your financial institution to verify that your money market funds are insured. Then you will need to keep your deposits below the maximum limits so that your entire account receives protection.
5. Some money market accounts offer introductory interest rates.
If an interest rate offer seems too good to be true when you open a money market savings account, then it probably is. Many financial institutions offer an introductory rate as a way to solicit new business. You would receive a higher amount for a limited time, usually between 6-24 months. If you don’t meet the terms and conditions provided by the bank or credit union, then you could lose this benefit.
The easiest way to verify how much you will earn with a money market savings account is to look at the way interest compounds each month. The terms and conditions you read during the sign-up phase will outline the performance structures for you. Compare the overall rate to what the advertised offer was to see if you’re receiving something that works for your money management needs.
6. Some institutions charge monthly maintenance fees.
Most banks or credit unions will charge you a specific fee if your balance drops below the minimum amount allowed for a money market savings account. You will also find a handful of institutions charge monthly maintenance fees to maintain the status of your money. You will want to consider if you can afford the minimum balance consistently and whatever the monthly charges are so that you can make money with this venture instead of losing it.
These fees might apply to the individual purchases that you make from the account each month. If you go over the limit of transactions, then penalties or fees might apply in addition to the regular amount.
7. Your interest rate might change each month.
Interest rates on savings accounts can change monthly depending on the overall market and the economic conditions at the time. Although this could be an advantage if the rates go up, it can be a significant problem when they fall. Because you cannot predict what is going to happen in this area, there is no way to authentically judge how the account will perform. If you need some level of certainty with your money, then this option might not be the best way to maintain your savings during the year.
8. Taxes apply to the interest you earn in a money market account.
Whenever you earn interest in a money market savings account, then that figure gets reduced by your taxation liability on the amount. Inflation will also reduce the purchasing power of your cash if the interest rates are lower than the reduction of monetary value that occurs in the economy. Because of this disadvantage, it might be worthwhile to put some of your money into a certificate of deposit with a higher interest rate, even if you end up paying early withdrawal penalties.
Any interest that you earn during the year in the United States gets taxed at the highest levels based on your income bracket. All it takes is an earnings report of $10 or more to force you to place this amount in your tax return. That means if your income falls into the 12% tax bracket, then all of your interest income is taxed at that rate.
9. You might lose the option to earn interest if you violate the terms and conditions.
When you place your cash into a money market savings account, then you are agreeing to all of the terms and conditions the institution requires in exchange for a higher interest rate. If you make more transactions than allowed or have the balance drop below the required figure for a specific amount of time, then the institution may involuntarily move your funds into a place that doesn’t earn interest at all.
Money market investments typically use treasury bonds as a way to grow money safely. If you have concerns about your local institutions, then you have the option to make the same investments with your cash. It only takes about 10 minutes to set up an account with Treasury Direct so that you can fund investments directly from your bank account.
A money market savings account is a useful tool for the times when you need cash relatively soon. It is a financial product that gives you a chance to earn a small return without placing your funds into a high-risk situation. It is especially useful if your primary need is to find large and infrequent expenses, such as an emergency fund, estimated tax payments, tuition costs, or home repairs.
This account is not the best place to keep your funds if you have regular expenses to pay. The limits placed on how many check withdrawals you can make limit the impact of your return. You could use a separate money market savings account for the largest monthly expenses you pay, such as your mortgage.
The pros and cons of a money market savings account are essential to review if you have a chunk of cash lying around doing nothing. It could at least be earning some interest for you while it’s resting, and that’s why this option should always be in your portfolio discussions.
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.