What Is a Money Market Account & How Does It Work?

What Is A Money Market Account?

If you’re looking for a place to put your money, there are several options to choose from. While traditional savings and checking accounts offer plenty of flexibility, they typically pay little to no interest. Other options, like certificates of deposit (CDs), pay higher interest rates but require locking in your funds until a specified maturity date.

Money market accounts (MMAs) may provide a happy medium, offering higher rates than traditional savings accounts and the ability to make withdrawals when you need them. This makes MMAs a popular option for emergency funds and other cash savings. If this sounds appealing, you've come to the right place. In our overview of how money market accounts work, we’ll walk you through some important pros and cons, and other options to consider.

Money Market Accounts Explained

A money market account is a type of deposit account offered by banks, credit unions, and other financial institutions. It blends features of both checking and savings accounts, paying interest on the account balance while also allowing easy access to your cash. MMAs often come with a debit card and may also offer check-writing privileges. Some also offer online bill payments and the ability to withdraw funds using an ATM card.

While this may seem like an attractive option for your cash-saving needs, it’s important to understand how MMAs differ from checking and savings accounts. For example, while money market accounts often allow for unlimited in-person and ATM withdrawals, they typically limit the number of checks you can write each month and may also place a limit on monthly debit card transactions and electronic transfers.

Money market accounts also typically have higher minimum balance requirements than traditional savings accounts, meaning that you may need more upfront cash to open and maintain an account^[1].

How Does a Money Market Account Work?

When you deposit money into a money market account, the bank or credit union can use it to fund loans to others and may also invest it in low-risk, short-term vehicles such as government securities, treasury notes, or certificates of deposit. Some of the interest generated from these investments is then passed onto you, the account holder, at the stated rate. This rate is typically variable and can fluctuate over time.

Money market rates are often tiered, making them attractive to those who have larger amounts of money to save. The account’s interest is compounded daily or monthly and paid into your account monthly or quarterly. You can deposit funds into a money market account anytime and make withdrawals within its limits without incurring withdrawal penalties.

Pros and Cons of a Money Market Account

When comparing money market accounts to other savings and investment options, there exist several potential benefits and drawbacks to consider. Some of the advantages that make MMAs attractive to both savers and investors include:

• Higher interest rates – MMAs typically pay higher interest rates when compared to traditional checking and savings accounts, allowing your savings to grow faster.
• Insurance – MMAs are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).

Before depositing your savings into a money market account, it’s also important to understand some potential limitations:

• Transaction limits – Many MMAs place a monthly limit on the number of certain types of withdrawals and transfers.
• Minimum balance requirements – MMAs often require a higher initial deposit and minimum balance than standard savings or checking accounts. Failure to maintain this balance might lead to fees.
• Fees – If you exceed the number of monthly withdrawals allowed or the balance falls below the required minimum, the bank may charge fees.
• Variable rates – MMAs typically have a variable interest rate that fluctuates, which in turn may create uncertainty.

When To Consider a Money Market Account

Depending on your specific needs and financial circumstances, a money market account may prove a suitable place for cash savings. The security, versatility, and flexibility offered by money market accounts make them attractive, but they may be more advantageous in certain scenarios.

MMAs are particularly useful for those pursuing short-term savings goals. They provide an efficient way to separate funds intended for future needs from those earmarked for everyday expenses, making an MMA a perfect tool for targeted saving strategies.

Some instances when you may consider a money market account include:

• Putting money aside for an emergency fund
• Planning significant outlays like wedding expenses or a vacation
• Earmarking funds for tax payments
• Saving for home renovation projects

If you’ve already maximized annual contributions to retirement savings accounts such as a 401(k), IRA, or Roth IRA, you may also consider using a money market account for additional savings. This can give you the flexibility of being able to access the funds if you need them without worrying about early withdrawal penalties.

A money market account may be a good option if you have accumulated a large amount of cash and want to earn additional interest.

Money Market Accounts vs. Money Market Mutual Funds

While money market accounts and money market mutual funds may sound similar, they serve different purposes and are governed by different regulations. A money market account is a type of deposit account at a bank or credit union that earns interest based on current interest rates in the money markets. While the interest rate in money market accounts may fluctuate depending on the economic conditions, the principal amount deposited remains secure.

On the other hand, a money market mutual fund is an investment product rather than a deposit account. These funds invest in short-term, high-quality securities and offer returns based on these investments. Unlike money market accounts, which are insured by the FDIC or NCUA, money market mutual funds are investment products that carry no government insurance. Although these funds aim to keep their net asset value (NAV) stable at $1 per share, in rare cases, they can fall below this amount, which could result in losing principle. However, they are generally still considered low-risk investments. 

When To Seek a Money Market Alternative

While money market accounts offer many benefits, they may not be right in every situation.

For example, due to transaction limits, money market accounts typically aren’t the best option for an account you’ll use to pay regular monthly expenses. The variable interest rates may also affect the growth of your savings, which may not make an MMA the right option for your goals.

You typically also need to maintain a minimum balance to earn the advertised annual percentage yield (APY). If you have a small amount to invest, then a money market account may not be optimal.

When weighing your options, reviewing some of the most common money market alternatives may be helpful. Understanding each option's potential advantages and restrictions can help you make an informed decision that suits your financial situation and goals.

Alternatives To Money Market Accounts

The following investment options may serve as a suitable alternative to a money market account depending on your goals and circumstances.

Traditional Savings Account

A traditional or standard savings account, typically has low or no requirements for the initial deposit and ongoing balances. Savings accounts pay interest, although at a lower rate than an MMA, and are also FDIC or NCUA insured. If you appreciate the simplicity of traditional banking methods and are not necessarily seeking high interest rates, a savings account may provide an appropriate choice.

Regular Checking Account

A significant distinction between money markets vs. checking accounts is that regular checking accounts typically do not pay interest. However, they usually do not limit the monthly number of checks, electronic transfers, or withdrawals either. If you need easy, constant access to the funds for regular expenditures, and earning interest is not a top priority, a regular checking account might be a good option.

High-Yield Savings Account

A high-yield savings account may pay a higher interest rate than a standard, or traditional, savings account. High-yield savings accounts are different from money market accounts, in that they typically do not have a minimum opening deposit or ongoing balance requirements. If earning a high interest rate on your savings is a priority and frequent access to funds is not required, a high-yield savings account could make a good choice.

Certificate of Deposit (CD)

Certificates of Deposit (CDs) offer higher interest rates than most other types of accounts. However, one of the primary differences between money markets and CDs is that CDs require you to leave your money untouched for a set period of time. If you have a chunk of money that can be set aside for a certain duration and want to earn a high return on it, a CD may be a preferable alternative.

Supercharge Your Savings With a Money Market Account

Money market accounts offer a unique blend of features that make them a versatile savings option for those looking to earn higher interest rates while maintaining access to their funds.

Whether building an emergency fund, saving for a specific goal, or seeking a reliable place to grow cash savings, a money market account may be a valuable addition to your financial strategy. If you're ready to take the next step in optimizing your savings, start by exploring PNC Bank's money market accounts now.