What is a Money Market Account and How Does it Work

If you're looking for a safe and rewarding place to store savings—but don't want to give up easy access to your funds—a money market account could be an excellent fit for your needs. Money market savings accounts combine some of the best checking and savings account features in a single, high yield account.

Similar to a high yield savings account, a money market account offers the security of a federally insured deposit account paired with a competitive interest rate. But unlike traditional savings accounts, money market accounts make it easier to pay for big-ticket purchases directly from your account.

Here's an in-depth look at how money market accounts work, pros, cons and the steps to a money market account.

What Is a Money Market Account?

A money market account is a type of interest-bearing account designed to combine the best features of a savings and checking account. For example, if you've been saving for a big-ticket purchase with a money market account, you can use a linked checkbook or debit card to draw directly from your money market balance to pay for the purchase, rather than transferring money from one account to another.

Money market accounts may also be referred to as money market deposit accounts (MMDAs) and are typically FDIC-insured.

How Does a Money Market Account Work?

More flexible than a traditional savings account and with higher interest rates than a checking account, money market accounts essentially work as a hybrid deposit account: part savings account and part checking account, but with limits.

As with other savings accounts, you'll earn interest on your account balance, helping your savings grow. However, money market accounts are subject to the same rules and regulations as other savings accounts. Although federal rules on savings accounts are more relaxed now than they once were (for example, the Fed's longtime six-transaction rule on savings account withdrawals is no longer in effect), that doesn't necessarily mean a bank or credit union has also relaxed its rules.¹

You can make unlimited deposits into a money market account, and each withdrawal can be as big as you want, up to your account balance. Many money market accounts support withdrawals using online banking or electronic funds transfers and by check or debit card.

Interest rates are almost always higher than those of checking accounts and often beat those of traditional savings accounts. In some cases, rates are on par with a high yield savings account. But, depending on your bank, minimum balance requirements may apply to earn interest or avoid a monthly fee.

How Does a Money Market Account Earn Interest?

Banks and credit unions pay interest based on your money market account balance. With a higher balance, your earnings increase. And because interest earnings compound over time, your savings grow faster and faster.

When you open a money market account, your bank or credit union typically offers you interest measured with annual percentage yield (APY). Money markets typically have a variable interest rate, meaning the rate may rise or fall, influenced by market interest rates and other factors.

So, for example, if the Federal Reserve changes its target interest rate, called the federal funds rate, your financial institution may follow suit with a similar interest rate adjustment.

Money market accounts are known for offering relatively competitive interest rates. But remember: These are deposit accounts, not investment vehicles. So don't expect as big a return on your savings as you might get with a riskier or less liquid savings option (like investing in stocks). You may also find higher rates through other deposit accounts, such as high yield savings accounts or certificates of deposit (CDs).

Are There Withdrawal Restrictions or Limits on Money Market Accounts?

Withdrawal restrictions on money market accounts can vary by financial institution. According to Federal Reserve old rules, accounts allowing more than six "convenient" withdrawals per month are not considered savings accounts,¹ so your bank may enforce a limit of six monthly withdrawals for money market accounts.

In April 2020, the Federal Reserve announced that it would not enforce the six-transaction rule specified in Regulation D because it no longer saw the limit as necessary.² It now advises financial institutions that they are free to formally classify savings accounts as transaction accounts if they wish, rather than savings deposit accounts.

However, it's up to the bank to decide whether it wants to keep the six-withdrawal rule in place. There's no requirement for banks to offer unlimited withdrawals. When comparing money market accounts, check to see if there are any withdrawal limits to understand how your bank handles money market account withdrawals.

But even before the Fed relaxed its rules, savers were still free to make transactions considered "inconvenient" without limits, including ATM, mail, telephone or in-person transactions.³ So even if a financial institution limits the number of checks you can write or how many electronic transfers you can make, you may still be able to make other types of withdrawals over six per month.

Benefits of Money Market Accounts

Here's a quick overview of the common benefits of money market accounts:

Competitive interest rates

Money market accounts usually feature higher rates of interest than other deposit accounts. Online banks often feature higher interest rates than traditional brick-and-mortar banks, so you may be better off switching banks if yours offers mediocre rates.

Convenience

Money market accounts make it easy to store money in an interest-bearing account and use it when needed. With unlimited deposits, for example, you can sweep extra cash into your money market account whenever you'd like, even in small amounts, and then withdraw as needed, within your bank's limits. Automated savings every payday is an excellent way to build your money market savings balance.

Flexibility

You can spend money directly from your money market account or use it to save up for large purchases or fixed expenses. Money market accounts are often a good choice for saving up a down payment for a car, for example, as you can save regularly and take a check to the dealership when you're ready to purchase. Unlike some savings options, you can easily access your money whenever you want.

Other deposit accounts can be more restrictive. For example, certificates of deposit also offer competitive returns but require you to leave your money in the account for a fixed term or pay a hefty penalty for early withdrawal. Similarly, high yield savings accounts offer competitive interest rates, but you can't write checks.

Great for short-term savings

Money market accounts are ideal for storing funds for shorter-term savings goals, such as saving up for a new car or a vacation. You'll not only earn interest on your savings, but you'll also be able to conveniently make payments directly from your account. That's a big perk for banking customers looking to simplify their lives.

Downsides of Money Market Accounts

There are also some potential disadvantages to consider:

Potentially limited transactions

Although the Federal Reserve no longer enforces a six-transaction limit on "convenient" withdrawals, some financial institutions may still enforce that rule. If so, you might not be able to withdraw as freely and easily from your money market account as you may like.

Fluctuating interest rate

Unlike a CD account, the interest rate you receive in a money market account is variable. The bank can change the rate at any time without notice. While that's beneficial in a rising interest rate environment, seeing your rate decrease is no fun.

Not the best for long-term investing

You'll earn interest on a money market account, but it may not be enough to keep up with inflation. While you'll experience increased risk, a brokerage account is typically best for long-term goals like saving for retirement. Money market accounts are better for short- to medium-term goals and liquid savings, such as an emergency fund.

Minimum deposit requirements

Some money market accounts require significant deposits to open, and you may have to keep large balances in your account to avoid monthly fees. However, that's not true for all money market accounts. For example, Synchrony Bank money market accounts do not require a minimum balance.

Are Money Market Accounts FDIC-insured?

Virtually all money market accounts offered by banks are FDIC-insured. If your bank is a Federal Deposit Insurance Corporation (FDIC) member (a deposit insurance agency backed by the federal government), your funds are guaranteed, even if the bank goes out of business, up to FDIC limits.⁴ Knowing how FDIC insurance works is helpful regardless.

If you leave your money in an FDIC-insured deposit account, such as a money market account, that account will be insured for up to $250,000 per account holder, per insured bank, for each ownership category. If you are a deposit account holder with Synchrony Bank, your money is insured by the FDIC. You may get up to $500,000 in FDIC coverage for joint accounts with two account holders.⁵

If you deposit your money in a money market account offered by a credit union, the National Credit Union Administration (NCUA) is responsible for deposit account insurance. Similar limits apply.⁶

Whether you bank with a credit union or bank, you can deposit up to $250,000 per account holder into a money market account with virtually no risk. Your money is automatically insured if you open an NCUA- or FDIC-insured account. There is no need to apply for insurance separately. Your financial institution takes care of that.

It's also important to note that money market accounts differ from money market investment funds. Money market funds are investment funds and may lose value.⁷

Is a Money Market Account Worth It?

Consider your life stage and financial goals. A sound financial strategy for most people involves diversifying your savings and investments and allocating funds based on when and how you plan to use them. Spreading your funds across various accounts helps keep your savings safe as your money grows and allows you to capitalize on different account features.

Here are three tips for setting up your savings strategy:

1. Consider "why" you're saving

To determine the best account for a particular subset of funds, consider why you're putting away that cash. Based on your financial goals, you can pick the right combination of savings accounts.

• • Why do you want to save this money?
• • What do you intend to use it for?
• • When do you plan to use it?
• • How do you expect to spend it?

2. Match your financial goals to your accounts

Next, look for accounts that cater to your needs now and in the future. For example, money market accounts are ideal for storing short-term and medium-term savings (such as your emergency fund) that you want to keep accessible while maximizing your interest earnings.

Money market accounts also work well for holding cash that you aren't yet sure how you'll use. For example, if you have extra funds but don't know where to put them, a money market account's flexible features can help you earn interest in a risk-free account while considering your options.

When deciding how to allocate your savings, consider the perks offered by each account type and then ask yourself how likely you are to use an account's best features. For example:

• • Do you plan to use your savings to help fund upcoming expenses? Writing a check directly from your money market account could be a real time-saver.
•  
• • Do you have a medium-term savings goal, such as a wedding or a vacation you plan to take in a few years? You may get a better rate of return and guardrails to keep you from squandering your savings with a multi-year certificate of deposit. CDs typically require you to keep your money in the account for a preset term, often six months to five years, or pay a penalty (unless it's a bump-up CD). In exchange for your commitment, you'll earn a competitive rate that's fixed and guaranteed for the account's term, making it stable and predictable.
•  
• • Are you saving the money for a more distant goal, such as college or retirement? In that case, you're likely better off putting your money in a tax-advantaged investment account, such as a 401(k), IRA or 529 plan, offering higher returns and special tax breaks. Remember, though, that tax-advantaged money market accounts exist for some long-term needs, including retirement, so don't count them out when making plans. For example, Synchrony offers IRA money market accounts with tax-free qualified withdrawals.

3. Consider all your options

Use this chart to help you decide which type of deposit account is your best bet.

	Money market account	High yield savings account	Certificate of deposit (CD)
ATM access	Yes	Yes	No
Fixed interest rate	No	No	Yes
Check writing	Yes	No	No
Early withdrawal penalty	No	No	Yes, usually
FDIC insurance	Yes	Yes	Yes

Start by comparing rates on money market accounts and looking for a low-fee account that offers a top APY with no minimum balance requirements. For example, Synchrony's FDIC-insured money market accounts don't charge any account fees or require a minimum balance. If you keep your account over $0, you can maintain your savings fee-free. Once you've settled on an account provider, apply online or visit a nearby branch.

How to Open a Money Market Account

If you're a new Synchrony Bank customer:

Synchrony Bank makes it easy to apply online, and it only takes a few minutes. Plan on entering personal information, including your contact details and Social Security number.

If you have questions or need help filling out your account application, call 1-866-226-5638 to speak with a personal banker.

If you're already a Synchrony Bank customer:

Sign into your online banking account and follow the links and prompts to open a new money market account. Once you set up a money market account online, you can fund your new account instantly from an existing Synchrony Bank account or enter an online transfer from a non-Synchrony Bank account.

The Bottom Line: Money Market Accounts Can Help Grow Your Savings

You'll be hard-pressed to find a more versatile savings option than a money market account. This could be your ideal account if you're searching for a flexible, low-hassle savings account that still offers a solid interest rate.

 

Eric Rosenberg is a financial writer, speaker and consultant based in Ventura, California. He is an expert in banking, credit cards, investing, cryptocurrency, insurance, real estate, business finance and financial fraud and security. His work has appeared in many online publications, including Time, USA Today, Forbes, Business Insider, NerdWallet, Investopedia and U.S. News & World Report. Connect with him and learn more at EricRosenberg.com.

 

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