What is a money market account?

If you’re like most people, you probably want to get as much growth out of your savings as possible. You also want the ability to access your savings when you need them, whether you’re paying off an emergency expense or planning a well-earned vacation.

That’s where a money market account can help. Many financial institutions like banks and credit unions offer them as an option for consumers who want to maximize the value of their money while maintaining the ability to withdraw from their accounts as needed. However, money market accounts aren’t right for everybody — and they aren’t necessarily the right savings vehicle for every financial goal.

We asked James Allen, who is not only a CPA but also a Certified Financial Planner® professional and the founder of Billpin.com, when you should consider a money market account and when you should put your money into a different type of savings vehicle.

“Choosing between a money market account and other savings or growth vehicles is like choosing between a pop song and a symphony,” Allen told us. “It all depends on your financial rhythm and how you want your money to dance.”

Here’s what you need to know before you take to the proverbial dance floor.

How does a money market account work?

Money market accounts should not be confused with money market mutual funds. Money market accounts are FDIC/NCUA-insured accounts offered by banks and credit unions, and are considered a low-risk opportunity to earn higher interest rates on your savings.

How do money market accounts work? “The banks and credit unions use the funds from money market accounts to invest in stable, short-term, low-risk investments like Treasury bills and commercial paper, and the returns from these investments are then passed on to the account holders in the form of interest,” Allen explains. This allows you to benefit from overall market growth without having to deal with the risks associated with market volatility.

What are the benefits of a money market account?

“The allure of a money market account is akin to the siren song of a well-crafted melody,” says Allen. “It’s harmonious, offering higher interest rates than regular savings accounts as well as check-writing privileges and even a debit card.”

Since money market accounts generally offer higher interest rates than standard savings accounts while simultaneously allowing account holders to withdraw money from the account for everyday purchases, many people consider money market accounts to be a win-win, because they offer a little more than a traditional savings account.

What are the risks of a money market account?

“Like any song, a money market account has its discordant notes,” Allan told us. “These include limited transactions, potential fees, and minimum balance requirements.”

In order to maintain the high interest rates associated with interest-bearing money market accounts, the banks and credit unions that manage the accounts need to maintain a certain amount of stability. This often means limiting the number of withdrawals account holders are allowed to make every month, generally in accordance with savings account withdrawal limits. And in most cases, it means requiring account holders to carry a minimum balance at all times.

If your financial situation makes it difficult to maintain a minimum balance or limit your monthly debit charges, opening a money market account might not be right for you.

When should people consider a money market account?

“I’d recommend a money market account for short-term goals, like saving for a vacation or a down payment on a car,” Allen advises. “Think of it like a piggy bank on steroids, helping you save faster.”

A money market account could also be a good way to set up your emergency fund or manage the financial burden of changing jobs. You might even want to use your money market account to save money for the holidays, especially because the limited withdrawals and minimum balance requirements might help you keep your money in the account until the holiday season arrives.

That said, Allen does not recommend using money market accounts to fund all of your financial priorities—especially longer-term financial priorities such as retirement accounts or college funds.

“For long-term goals like retirement, putting your savings in a money market account is like trying to run a marathon in flip-flops,” he says. “You’re better off considering other vehicles like high-yield savings accounts or certificates of deposit. These accounts are like sturdy running shoes, providing better support for the long haul.”

Many people don’t limit themselves to just one savings vehicle, of course. You might want to combine the comfortable sandals of money market accounts with the sturdy running shoes of high-yield savings and the fast car of the stock market, for example — but we’ll let you decide how to divide up your dollars.

All you have to do is ask yourself how you want your money to dance.