Money Market Accounts: Pros & Cons

When considering savings products, you may be wondering about money market accounts. Money market accounts are deposit accounts that often pay higher interest rates than traditional savings accounts. However, they may not be a good fit for everyone.

This article will delve into money market account pros and cons to help you decide whether one of these savings vehicles is a good fit for you.

Note: Keep in mind that this article is about money market accounts rather than money market funds, which are a type of mutual fund.

Understanding Money Market Accounts

Money market accounts are like hybrids of savings and checking accounts. They pay interest on account balances while also providing account holders with access to their cash. In addition, some money market accounts use a tiered rate system — the higher the account balance, the higher the interest rate that can be earned.

When you open a money market account, you’ll typically receive some way to access your cash. For example, PNC provides owners of its Premiere Money Market Account with a free banking card they can use. Other banks may offer debit cards or even a book of checks.

Most money market banking cards can be used at ATMs to withdraw cash, make deposits, and manage balances. Your bank may also allow customers to make online bill payments from their money market accounts.

As with regular savings accounts, some banks limit fee-free withdrawals to six per month.

Now let's consider some money market account pros and cons.

Money Market Account Pros

Several features make money market accounts attractive to savers, including higher interest rates, easy access, and FDIC insurance.

Competitive Interest Rates and APYs

Many money market accounts may offer rates higher than traditional savings accounts. You'll often see this expressed as the account's annual percentage yield (APY). APYs include the interest rate and the frequency with which these accounts compound (add the accrued interest back to the account balance). APYs are typically higher than interest rates and can give you a more accurate idea of how much money an account can earn than the interest rate does alone.

As mentioned earlier, some money market accounts offer tiered interest rates or APYs. This incentivizes account holders to keep more money in their accounts in return for larger earnings.

FDIC Insurance

Another benefit that most money market accounts offer is insurance from the FDIC up to the allowed maximum. This means that, in the highly unlikely event that your bank fails, any deposited funds and accrued interest will be refunded or transferred to a similar account at another FDIC-insured bank.

However, not all banks are FDIC-insured. Be sure to check with your bank before signing up for a new account.

Money Market Account Cons

Of course, there are also some downsides to money market accounts that must be considered before opening.

Monthly Fees and Minimum Balance Requirements

One tradeoff for the higher interest rates offered by money market accounts is that many come with monthly fees if the minimum balance requirements aren’t met. Plus, some banks charge monthly maintenance fees regardless of the amount of money in the account.

In addition, many banks may charge fees for exceeding the allowed number of transactions per month, as well as for overdrawing on your account (spending more than the deposited amount).

A traditional savings account with no minimum balance requirement may prove a better option if you're just starting to save money. This way, you don't need to worry about reaching the minimum requirement to avoid fees. Once you've saved up the minimum requirement, it may be worthwhile to transfer the balance to a money market account and use the traditional savings account for another savings goal.

Transaction Limits

Money market accounts may come with unlimited fee-free cash withdrawals using your bank card at an ATM or bank branch. However, your bank may also limit the number of other kinds of transactions, transfers, and withdrawals you can make. In addition, not all banks offer unlimited fee-free ATM withdrawals. Be sure to check with your bank to fully understand the account's limits before signing up.

Variable Rates

Typically, the interest rates or APYs you can receive with a money market account are variable. This means you may sign up for an account at a great rate only to watch the interest payouts shrink over time. It's always worth checking the fine print and shopping around for a money market account with terms that seem amenable to you.

Are Money Market Accounts Worth It?

Whether a money market account is worth opening depends on your unique financial needs and goals. However, there are some circumstances in which a money market account can be a great fit:

• Short-term savings goals: A money market account can be a great place to tuck cash away for an upcoming expense such as a major vacation, a wedding, or a new car purchase. The higher interest rates may help you meet your goals sooner than you would with a traditional savings account. Plus, money market accounts may offer easy access to cash, which can come in handy when your specific savings goal has been met.
• Emergency funds: Thanks to their accessibility, money market accounts can be a good fit for an emergency fund. You can use the connected debit card or checkbook to pay for an unplanned expense such as a medical emergency or an appliance replacement.
• Tax payments: Saving for tax time can be one of the biggest headaches of being an independent contractor or solo entrepreneur. By putting money away in a money market account, you can keep your tax funds separate from your spending account while making your tax payments with ease.

Alternatives to Money Market Accounts

Of course, money market accounts won't be the best solution for everyone. Whether you need the ability to make more frequent transactions or would like to earn a higher, steady interest rate, here are some alternatives to money market accounts that are worth checking out:

• Checking accounts: Most standard checking accounts do not pay interest. However, most offer unlimited transactions and access to your funds. If you're more concerned about being able to regularly spend your money than letting your savings grow, a checking account may be a better fit.
• Traditional savings accounts: Traditional savings accounts typically don't pay as much interest as money market accounts. In addition, your bank may limit the number of transactions and withdrawals you can make per month without paying a fee. However, unlike money market accounts, many traditional savings accounts don't charge monthly fees or require a minimum balance.
• High-yield savings accounts: High-yield savings accounts pay higher interest rates than standard savings accounts. However, they also usually have the same withdrawal and transaction limits (typically, six fee-free transactions per month). Still, high-yield savings accounts typically don't have the minimum balance requirements of money market accounts. This makes them a potentially better fit for savers who are just starting out and can't yet reach the minimum balance requirement of a money market account.
• Certificates of deposit (CDs): CDs typically earn higher APYs than money market accounts. However, these savings vehicles usually require you to leave your money deposited for a specified period of time. If you withdraw funds before your CD "matures," the bank will often impose a fee or reclaim any earned interest from the account. If you have a long-term horizon for your savings goals and don't foresee the need to withdraw cash anytime soon, a CD may be a great alternative to a money market account.

The Bottom Line

There are several money market account pros and cons to consider before you open a new account. Ultimately, the decision to choose a money market account is up to you. However, by understanding how this account type works, you can make a more informed decision.