What is a money market account?

Checking and savings accounts are solid options for managing your finances, but money market accounts can also provide a mix of safety, growth and liquidity. A money market account is an interest-bearing deposit account that typically combines the features of savings accounts and checking accounts. If you're saving for a future goal but also want convenience and flexibility with your money, a money market account may be worth considering.

How does a money market account work?

A money market account combines elements of both a checking and savings account, but it has some key differences and features:

• A money market account typically has a higher opening and minimum balance requirement than traditional savings accounts, often around $2,500.
• Money market accounts can include checks and debit cards with ATM access. However, the number of certain transactions each month may be limited, like online transfers and outgoing checks.
• In exchange, financial institutions often offer a higher interest rate on money market accounts than standard savings accounts.

What are the benefits of a money market account?

If you're looking for a savings option that delivers both earning potential and easier access to your funds, a money market account could be a smart choice. Benefits include:

• Interest: Money market accounts may provide a higher interest rate than a traditional savings account. The interest rate is typically variable, meaning it can change over time based on market conditions, Fed rate changes and financial institution needs and goals.
• Convenience: Unlike certificates of deposit (CDs), which hold your money for a set term, money market accounts often provide more flexibility with a debit card and ATM access for deposits and withdrawals.
• Check-writing privileges: You may be able to write a limited number of checks from your money market account each month, eliminating the need to transfer funds from savings to checking.
• FDIC insurance: The Federal Deposit Insurance Corporation (FDIC) insures money market accounts held at FDIC-insured banks. Deposits are insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

What are the downsides of a money market account?

While they can be a good option for short-term savings or emergency funds, money market accounts come with several downsides worth considering. Some of these include:

• Lower interest rates: Money market accounts often offer higher rates than regular savings accounts — but lower than high-yield savings accounts or CDs, especially in a low-rate environment.
• Minimum balance requirements: Many money market accounts require a minimum balance to open the account or to avoid monthly fees.
• Limited transactions: Federal regulations used to limit withdrawals to six per month for savings accounts and money market accounts. Some financial institutions still enforce these limits.
• Fees: Money market accounts may come with monthly maintenance fees, excess transaction fees or ATM fees, especially with traditional brick-and-mortar banks.
• Variable interest rates: Most money market accounts have variable interest rates, meaning your rate can go up or down depending on market conditions.
• Limited long-term growth: Money market accounts are safer than investing in the market, but the returns typically don’t keep pace with inflation. They're better suited for short-term savings than long-term wealth building.
• Less accessibility: While money market accounts are more flexible than CDs, they may still be less convenient than checking accounts. Some limit check-writing and ATM access.

What is the best way to use a money market account?

You may already be contributing to a traditional savings account, but a money market account can be a more effective way to meet your other savings goals, such as:

• Intermediate financial goals: Whether you're funding a wedding, prepping for vacation or saving for a car, a money market account can help you make progress toward each of those goals. You can also use a money market account alongside specialized accounts to save for a home or your child's college tuition.
• Emergency funds: If you have a rainy-day fund you'd like to grow, a money market account can help you save for the future without drastically changing your habits. Plus, if the account has withdrawal restrictions, you may be less likely to dip into it for other expenses, keeping your money safely tucked away for when you need it most.
• Supplemental retirement savings: In addition to contributing to your 401(k) and an individual retirement account (IRA), consider using a money market account to set aside more funds for retirement. If you've already maximized your yearly contribution to your traditional IRA, Roth IRA or 401(k), a money market account could help you continue to grow your nest egg.

Who should consider a money market account?

Money market accounts can be a smart option for savers. While they may not be ideal for everyone, they are a valuable option worth consideration.

A money market account tends to work well for:

• People with higher balances
• Savers seeking better rates
• Individuals needing regular access to their funds
• Low-risk investors
• Short-term savers

It may not be the best choice for:

• Those who keep a low balance
• Those who need to make frequent transactions
• Long-term investors seeking higher returns

How much will $10,000 make in a money market account?

How much interest you’ll earn with a money market account depends on several factors, including your interest rate and the amount of money in your account.

Let’s say you put $10,000 into a money market account with an annual percentage yield (APY) of 0.5% compounded daily. Compound interest means earning interest on both your deposits and the interest those deposits accumulate. As a result, your money grows more over time compared to simple interest.

To estimate your earnings, you can use the daily compounding formula:

APY = (1+ r/n)n - 1
r = Your account's annual simple interest rate (expressed as a decimal)
n = How often your bank compounds interest

You can also use an online calculator for easier comparison.

For $10,000 at 0.5% APY over one year, using this formula, you’d earn about $50 in interest if you don’t make any additional deposits.

Now let’s look at higher balances:

• $50,000 at 0.5% APY, compounded daily for one year, without any additional deposits, you’d earn about $250 in interest.
• $100,000 at 0.5% APY, compounded daily for one year, without any additional deposits, you’d earn about $500 in interest.

Money market accounts vs. savings vs. CDs: Which is better?

Money market accounts, traditional savings accounts and CDs can help you grow savings through interest. The choice comes down to their particular features and perks. Let's compare:

Ready to open a money market account?

Money market accounts may be valuable for some, but with any type of savings account, do your research first. Review any requirements before you park your cash, such as minimum deposit, balance requirements, withdrawal limits and fees. Learn more about money market accounts at Citizens.