Is A Money Market Account Worth It?

Looking for a place to stash some of your extra cash and make it work for you? This may be of interest to you: A money market account (MMA) often offers somewhat higher interest rates than a standard savings or checking account.

But all MMAs aren’t created equal, which means the rewards you reap can vary from bank to bank and account to account. We’ve summarized some of the important information you’ll want to know before you choose to open an MMA. Because after all, where you put your money can mean the difference between racking up interest or simply stashing cash.

Money Market Accounts Explained

MMAs differ from similarly named money market funds offered by investment firms. With an MMA, your money is insured by the federal government, which means you can’t lose money; the same can’t be said of a money market investment fund that isn’t FDIC insured.

MMAs often require maintaining a minimum balance, which can range from hundreds to thousands of dollars. Some accounts reward larger balances with higher interest rates. MMAs generally come with a debit card, allow up to six free withdrawals per month, and offer check-writing privileges.

Another plus: Since money market savings accounts usually offer higher rates than traditional savings accounts, they can help you combat the effects of inflation. But it’s worth noting that banks tend to pay higher interest rates when inflation is high, and if inflation rises faster than interest rates, money market accounts can lose some of their appeal.

For example, the consumer price index (which measures inflation) rose 7% in 2021; at the same time, the average money market account accrued only 0.09% interest in banks and 0.13% in credit unions. The result? MMA holders lost over 6% of buying power in that year on the money held in those accounts.

The results were better for MMAs in 2018, when inflation was 1.9%; at that time, the highest-paying MMA offered 2.01%. For MMA holders, the value of their savings remained about the same. In general, however, money in an MMA would have earned about 20 times the amount of interest as compared to that of a standard savings account.

Is A Money Market Account Right For You?

A money market account may be the right option for you if:

• Your primary financial goal is to save money
• You’d like your money to earn a higher interest rate than that of a traditional savings account
• You prefer not to tie up your money for months or years in a CD or other investment tool

It’s in your best interest (literally) to avoid MMAs that require regular monthly fees, as that will ultimately reduce your returns and detract from the higher interest that made the MMA a better financial choice in the first place. It’s also worth noting that if inflation significantly outpaces MMA interest rates, putting your money in a diverse investment portfolio may be the better option.

Money Market Accounts vs Other Savings Options

Savings Accounts

MMAs and savings accounts both offer easy access to your money, but savings accounts have an advantage when it comes to the required minimum balance. Most savings accounts can be maintained with a very low or zero minimum balance, which means you won’t be charged any maintenance fees.

This type of balance flexibility, however, comes with the caveats of no check writing and lower interest rates. Keep in mind that online banks sometimes offer high-yield savings accounts that match or exceed money market account interest rates, especially during times when overall interest rates are low.

Certificate of Deposit (CD)

CDs require you to essentially “lock up” your money for a specific period of time, usually months or years. You have the option of choosing the CD term; the longer the term, the higher the interest rate. If you decide to withdraw your money before the agreed-upon full term, you’ll be required to pay a penalty that usually equals a percentage of the total amount of the CD deposit.

Finding The Right Money Market Account For You

Smaller banks or credit unions located in your area can offer not only convenience but also decent MMA interest rates, especially when market conditions are right.

Online banks also offer MMAs, but access to your funds might be somewhat restricted as you won’t have access to a brick-and-mortar bank branch or an ATM network. However, you will be able to access your MMA money in an online bank by transferring funds to your traditional bank account.