The term "money market" may not be a banking term you hear every day, but it is a great financial tool! A money market account is a deposit account that gives you access to your funds while offering higher interest rates than typical checking or savings accounts. Here’s everything you need to know about money market accounts.
What is a money market account?
A money market account is a type of deposit account offered by financial institutions that blends the characteristics of savings and checking accounts. These accounts generally offer higher interest rates compared to regular checking or savings accounts, making them an appealing choice for individuals looking to earn more on their deposits while maintaining liquidity. Money market accounts often require a higher minimum balance than savings accounts, a factor that potential account holders should consider.
In addition to higher interest rates, money market accounts often provide check-writing privileges and debit card access, allowing for easy access to funds. This combination of features offers more flexibility in managing your finances while still earning competitive returns. However, like savings accounts, money market accounts may limit the number of transactions you can make each month without incurring fees, so it's essential to be aware of the specific terms of the account you select.
Are money market accounts covered by FDIC insurance?
Money market accounts are covered by FDIC insurance. This means your funds are insured up to $250,000 per depositor, per insured bank, for each account ownership category. This coverage ensures that even in the rare event of a flood, fire or bank failure, your money is protected.
How do depositors make money with a money market account?
Money market accounts generate returns for depositors through the payment of interest. Financial institutions typically pay interest on money market accounts, which is often compounded daily or monthly and then credited to the account regularly. The interest rate you receive on a money market account can vary and is influenced by both the broader economic environment and the policies set by the financial institution.
It's worth noting that not all money market accounts are created equal. Different institutions offer varying rates, and these rates can change frequently. Therefore, it's beneficial to compare rates from several banks to find the most advantageous option for your financial goals. Additionally, some institutions might offer promotional rates for a limited time, which can be an attractive short-term benefit but may revert to a lower rate after the promotional period ends.
How is the money market rate determined?
Money market rates are primarily influenced by the broader economic environment and decisions made by the Federal Reserve. When the Federal Reserve adjusts its benchmark interest rates, financial institutions often follow suit by modifying the rates on their money market accounts. This means that during periods of rising interest rates, the returns on money market accounts typically increase, and conversely, they may decrease when rates are cut.
Apart from the Federal Reserve's influence, individual banks set their rates based on various strategic factors. These institutions may adjust rates to attract new customers, retain existing ones, or achieve specific financial goals. For instance, some banks might offer higher rates to differentiate themselves in a competitive market, while others might offer promotional rates for a limited period to entice new depositors.
How to determine if a money market account is right for you
A money market account makes the most sense if you have a larger cash balance and want to earn interest while maintaining easy access to your money through checks, transfers and ATM withdrawals. It may not be the best choice if you need regular and frequent access to those funds since there are monthly transaction limits. If you are looking primarily for higher interest earning ability and don’t require liquidity, a Certificate of Deposit or high yield savings account might be better options.
It's always beneficial to stay informed about economic trends and Federal Reserve announcements, as these can signal potential changes in account interest rates. By understanding these influencing factors, depositors can make more informed decisions about where to place their funds to achieve the best possible returns.
Learn about our Money Market Accounts.
Savings Accounts
Savings accounts provide a simple, reliable way to save some extra cash over time. Opening a savings account allows you to earn interest on your money. Although basic savings accounts typically offer lower interest rates than a Certificate of Deposit (CD) or money market account, they also have the least restrictions and your money is easily accessible in a time of need. There are also options on the market for high-yield savings accounts which pay a higher interest rate of exchange for a high minimum balance requirement.
Money Market Accounts
Compared to savings accounts, money market accounts generally offer higher interest rates in exchange for some access restrictions to your funds. Money market accounts include some check writing and debit card privileges, but they tend to be less flexible than regular checking accounts.
Certificates of Deposit (CDs)
Certificates of deposit, also known as CDs, typically offer higher interest rates than Savings Accounts or Money Market Accounts. In exchange for this higher fixed interest rate, the funds that you place in a certificate of deposit cannot be accessed (without paying a significant penalty) for a set period of time, with terms generally ranging from three months to five years. There are some “no penalty’ options on the market today for those who might anticipate the need to access the funds before the term is up.
See the table below for a comparison of the pros and cons of each account type.
Account Type | Pros | Cons |
---|---|---|
Basic Savings |
|
|
Money Market |
|
|
Certificate of Deposit |
|
|
As always, please contact us with any questions or concerns.
Mint brings together everything from your balances and bills to your credit score and more, gathering all elements of your financial life in one place that’s easy to understand.
What does it cost?
Free
- Connects to almost every US financial institution connected to the internet
- Automatically updates and categorizes your information and transactions
- Analyzes thousands of offers and makes recommendations to help you save the most based on your lifestyle and goals
- Provides you with a free credit score
PocketGuard helps you spend more time living, while staying on top of your finances, by tracking your spending, making a budget, and lowering your bills.
Free for the Basic subscription; monthly or annual paid subscription for PocketGuard Plus
- Link credit cards, checking and savings accounts, and investments and loans
- Updates and categorizes your transactions in real time
- “In My Pocket,” which calculates the money left over after you’ve paid all bills and set aside some money for savings, allows you to spend confidently
- Automatically builds a personalized budget, based on your income, bills, and goals
- Finds way to save you money, like negotiating lower bills, getting high interest savings accounts, and more
You Need A Budget (YNAB) is a proactive system that teaches you how to manage your money and get ahead by requiring you to be forward-thinking and intentional about every dollar.
What does it cost?
12 months free for students with proof of enrollment
- Real time info from any device, anytime
- Easily share finances with a partner
- Graphs and charts to track progress
- 100+ free, live, online workshops offered every week
- Assign a job to every dollar of your income
- Envelope-based system, which controls spending by allocating the exact amount of income available
Acorns is a savings tool that helps you invest, save and spend responsibly by investing your spare change, helping you save for retirement and growing your financial knowledge.
What does it cost?
$1, $2, or $3 per month, depending on the level chosen; Acorns Core ($1/month level) is free for college students
What does it offer?
- Automatically rounds up purchases (on linked credit or debit cards) and invests the change
- Change goes to an investment portfolio diversified with exchange-traded funds (ETFs), which was developed with help from a Nobel Prize-winning economist
- Automatic daily, weekly, and monthly investments
- No minimums and no trade fees
- 200+ Found Money partners will automatically invest in your Acorns Core account ($1/month level) when you shop with them
Albert is a new type of financial service that uses technology to automate your finances, with a team of human experts to guide you.
Free for the basic plan
- Analyzes all your financial accounts and builds a unique budget plan based on your income, spending habits, and goals
- Overpayment protection: notifies you when you’re overpaying and helps you cut costs
- Analyzes your income and spending every day and sets aside small amounts of money you can safely save
- Albert Genius Feature allows you to text human experts and get personalized advice on topics like investing, paying down debt, or saving for a goal
- Annual Fee
The first factor to consider when choosing a credit card is whether a given card requires an annual fee. Even if you plan to pay off your balance in full each month, having a credit card can still cost you – some cards cost several hundred dollars a year in exchange for a higher cash back percentage or travel perks. However, there are many credit cards that charge no annual fees. Depending on your financial situation, spending habits, and interest in rewards, decide whether paying an annual credit card fee makes sense for you.
- APR
The annual percentage rate (APR) is the rate charged for borrowing money on credit. When looking for a credit card, you’ll find that most cards have variable APRs, meaning that the interest rate fluctuates over time. In this case, credit card companies will likely advertise a range within which the APR on a card will fall. You might also find that some cards offer a 0% introductory APR for a given time period, after which the variable APR kicks in. This is usually done to entice you to sign up for their card. If you plan to make a big purchase soon after getting your credit card, consider choosing a card with a 0% introductory APR so that you have time to pay off the purchase without interest. Credit cards with higher APRs are often available for people with lower credit scores or offer higher rewards, so consider your individual situation when evaluating the interest rates on different cards.
- Rewards
Many credit cards offer rewards in exchange for frequent use. These rewards include airline miles, hotel points, discounts at specific stores, cash back, and more. If you want to earn something in return for your credit card use, choose a card that rewards your spending habits and provides you with relevant incentives for your lifestyle. Keep in mind that credit cards with the best rewards usually require good credit and may charge higher interest rates on your balance. Try and pay your balance on time and in full to maximize the benefits of your card.
- Late Payment Fee
If you don’t pay the minimum amount due on your credit card each month, you’ll likely face a late payment fee. This fee can quickly add up and greatly diminish the benefits of using a credit card. When choosing a credit card, pay attention to the late payment fee, the minimum monthly payment amount, and other terms regarding when and how your monthly bill must be paid.
- Balance Transfer Fee
If you plan to transfer credit card debt from one card to another to get a better interest rate, you’ll want to take note of the balance transfer fee. On average, balance transfer credit cards charge between 3% and 5% of the amount of debt that you’re transferring. However, you might choose a card that charges no balance transfer fee within a certain introductory period. This fee should also be on your radar when choosing a card if you have outstanding credit card debt.
- Foreign Transaction Fee
If you anticipate traveling internationally in the future, consider choosing a credit card that doesn’t charge a foreign transaction fee. This way, you can use your credit card overseas to get the best possible exchange rate without sacrificing 3% or so of your purchases.