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What is a money market account?
If you want to combine the growth potential of a savings account with the flexibility of a checking account, a money market account could be the way to go
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.
In this article:
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.
“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..”—James Allen, CPA, Certified Financial Planner®, founder of Billpin.com
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.
About Nicole Dieker
Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate, CreditCards.com, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.Read more by Nicole Dieker
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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