It’s likely that most people would see the letters “MMA” and think “mixed martial arts.” But this acronym can also represent “money market account,” which could pack just as powerful a punch where your money is concerned.
Many online banks offer money market accounts. They usually have better interest rates than checking or savings accounts and are more flexible than CDs (certificates of deposit) and IRAs (individual retirement accounts).
If you haven’t considered MMAs before, now might be a good time to check them out. With interest rates rising and banks competing for your money, the modest money market account could be an excellent fit for your overall financial portfolio.
Let’s take a closer look at what a money market account is, how it works and how it can fit in with your finances.
What Is a Money Market Account?
A money market account is an enhanced savings account with a far better interest rate, modified withdrawal terms and higher balance and deposit requirements. But unlike a savings account, an MMA has check-writing and debit-card capabilities.
MMAs are offered by banks and are insured by the FDIC (or NCUA if with a credit union). You are guaranteed a rate of return, but it will be based on your balance and the variable interest rate at the time. This can be a good thing if the Federal Reserve increases rates again soon.
How Do Money Market Accounts Work?
MMAs have their place in your lineup of banking products. They’re a perfect place to save money that you don’t intend to spend any time soon, and they’re better than leaving that money in a regular savings account that might earn a measly 0.05% interest.
For some people, CDs may be too conservative as a savings vehicle. And your money is locked up too tight. Meanwhile, the stock market may be too risky. For those who want something in between, MMAs could work because they have higher interest rates than savings, they’re insured and guaranteed (unlike the stock market), and they give you better access to your money than CDs.
In return for high interest rates, you may need to make a larger deposit to open the account and keep higher balances in the account every month to avoid fees. Because of this, MMAs are perfect to use for your rainy-day savings. Here are some things to use an MMA for:
- Emergency funds
- Down payments
- Home improvement projects
- Irregular or annual payments (mortgage, escrow, insurance, subscriptions, membership payments)
- Short-term savings goals (five years or less)
- Unused budget money (when you have extra money, stash it in this account and watch it grow)
- Vacation funds
- Investment goals (I’m currently using a money market account to save money for a 2-year investment goal).
What You Need to Know About Money Market Accounts
Don’t mistake a money market account for a money market fund.
While both money market funds (MMFs) and money market accounts (MMAs) share the same first name, that’s where the similarities end.
MMFs are sold by brokerages and are not insured. MMFs are mutual funds that invest in government securities such as CDs, T-Bills, short-term commercial paper, and other low-risk securities.
Money market accounts come with Federal Reserve restrictions.
Federal Regulation D prohibits you from making more than six withdrawals per month from both a savings and money market account. If you exceed these limits, the bank will impose fees and/or close your account. If you still have money in the account, it will be moved into a regular checking account.
The following types of transactions usually count against these limits. (Some details may vary by bank.)
- Online bill-pay and banking transfers
- Overdraft protection transfers
- Phone transfers
- ACH withdrawals
- Third-party transfers.
The following types of transactions typically don’t count against the six-withdrawal limit. (Some details may vary by bank.)
- In-person withdrawal/transfer
- ATM cash withdrawal/transfer
- Check to the depositor (cashier’s check).
This law applies to all types of savings and money market accounts at all banks.
Not all money market accounts are the same.
In addition to Regulation D, each bank will have its own set of balance, deposit and fee requirements. Be sure you fully understand all the details of the account before signing up.
Here are some things to be aware of:
- Watch out for limited-time rates — Sometimes, the interest rate shown is offered for only a limited time. For example, TIAA Bank is currently offering a 1.60% rate for one year. But after that one-year introductory rate, an account with a balance of $10,000 will earn only 1.10%.
- Know the tiers, rates and cutoffs — The advertised interest rate is usually reserved for accounts with the highest balances. For example, a bank offering 1.75% may be giving that only to accounts with $50,000 or more while offering only 1.00% for lesser balances. It could also be reversed, as is the case with Redneck Bank and All America Bank, which pay a higher rate only on lower balances.
- Know the balance restrictions — What are the minimum account balances? Some banks will charge you a monthly fee for each month you are below the balance, starting the first month, and some banks will close your account. Some banks will give you a grace period to bring your balance back up to the minimum before charging a fee. For example, Discover Bank will give you three months.
- Know which transactions count against Regulation D and which ones don’t — The types of transactions that count against this law will vary between banks. The list above covers the basics, but if you have questions, call the bank. MMAs give you enough flexibility to access money when you need it in ways that don’t count against the six withdrawals per month.
A money market account shouldn’t be used as a daily account.
The purpose of an MMA is to take advantage of the high interest rate. Letting the balance get too low erodes your ability to earn interest and increases your risk of having to pay fees. Therefore, money market accounts are best for rainy-day funds and short-term financial goals.
Comparing Features: Money Market Accounts, Certificates of Deposit, Savings Accounts
|Money Market Account||Certificate of Deposits||Savings Accounts|
|Access to money||Checks, debit card, online access|
Note: Some banks do not offer checks or debit cards.
|Only during the grace period and at the end of term (maturity date)||Online transfer; some banks offer ATM card|
|Interest rates||Fluctuates: Bank-dictated and/or competitive interest rate||Locked in: Bank-dictated and/or competitive interest rate||Fluctuates: Bank-dictated and/or competitive interest rate|
|Deposit required to open||$0–varies|
|Balance required to keep account open/free||Varies by bank||N/A (no deposits or withdrawals are allowed during term for traditional CDs)||Varies by bank|
|Fees and penalties||Varies by bank|
|Varies by bank|
|Varies by bank|
Have You Used a Money Market Account?
With the ability for you to earn a high, competitive interest rate and have quick access to your money, you could use the MMA to house an emergency fund or save for a down payment for a home, vehicle or family vacation.
Shop around to make sure you’re getting the best interest rate with the lowest fees. And make sure you understand the deposit and balance requirements.
Have you tried a money market account? Let us know your experience in the comments section.