How Does a Money Market Account Work?
A money market account (MMA) is an interest-bearing savings account offering a higher interest rate than traditional savings accounts. Typically, they also have higher minimum balance requirements and at least a few checking account capabilities.
Money market accounts work as savings accounts but allow customers to earn high interest, depending on their deposit amounts. Typically, the more funds a customer adds to their account, the higher their interest percentage, which usually starts at 0.01%. Some banks also have options such as an ATM card and a checkbook to write checks against an available balance.
What Is the Risk of a Money Market Account?
One risk of a money market account is that customers can still lose money if they have high fees and penalties, which can reduce their earnings. Also, interest rates can fall, resulting in value reduction and a decline in purchasing power. MMAs are covered by FDIC (Federal Deposit Insurance Corporation) deposit insurance, and, luckily, customers are protected in the event of a loss such as theft or fraud.
What Is the Minimum Balance of a Money Market Account?
Some banks require as little as $100 to open a money market account. At Amerant, the minimum to open a money market account is $100. However, other banks may require as much as $10,000 for new account openings. Amerant’s higher minimum money market account is the Relationship Money Market account, and currently (as of 4/7/2023) provides a rate of 4.00% APY*. For some banks, customers may also have to pay a service fee if their balance drops below the opening balance amount.
Pros and Cons of a Money Market Account
Unlike basic savings accounts, money market accounts are favorable due to their high-interest, guaranteed cash-on-deposit return. However, they have disadvantages customers may consider inconvenient during their banking experience.
Pros
Easy accessibility. A money market account is best for customers who want to conveniently deposit or have withdrawal access to funds. Standard transaction methods include ACH, personalized ATM cards, and e-checks. However, not all banks provide all withdrawal options and may issue a card only at the customer’s request.
Flexibility. Money market accounts are suitable for long-term savings goals but also support short-term funding. Whether transferring money or depositing funds, customers with multiple linked accounts can perform internal and external transactions.
100% liquid. Liquidity is crucial for a money market account because it reflects a bank’s ability to sustain losses and meets collateral or financial obligations, whether short or long term, such as recurring bill payments or overdrafts. For example, money market account funds are available for immediate withdrawal depending on financial needs but can still increase in value over a specific period.
Savings protection. Money market accounts often have minimal risks compared to a certificate of deposit account. Customer funds are secure and safe from unauthorized transactions.
Cons
Expensive balance requirements. Some banks may require only $1 to open an MMA, but customers must still deposit $2,500 to $5,000 to earn interest. Other banks set a $10,000 threshold and expect account holders to have the cash available to pay upfront.
FDIC limitations. While the FDIC insures money market accounts, they lack government protection, which can compromise funds and account security. Although MMAs are typically stable and safe to invest up to the $250,000 limit, customers must still consider the risk after a deposit.
Withdrawal restrictions. Money market accounts typically limit customers to six monthly transactions, which is a similar restrictive feature of savings accounts. While some banks waived fees for excessive transactions at the peak of COVID-19, others remained firm about the Regulation D guideline[JD1] , despite the pandemic. Therefore, customers may still be responsible for withdrawal fees for additional transactions.
Which Is Better? Money Market vs. Other Deposit Accounts
Money market accounts are beneficial in helping customers receive a high return as they save money. However, other accounts provide similar features and capabilities in comparison to MMAs.
Money Market vs. Savings Account
Money market accounts include checking capabilities, allowing customers the flexibility and freedom to write up to several checks monthly. With a savings account, customers may only earn a limited return, despite their balance amount, unless they have a high-yield interest-bearing account.
Money Market vs. Certificate of Deposit
MMAs and CDs have minimal investment risks and offer competitive cash deposit returns. While a CD might benefit customers who opt to grow their funds over a three- or 60-month period, they must keep their money in their account for the duration of the term. Otherwise, they could face a penalty if they make a premature withdrawal, resulting in account closure and forfeiture of any interest earned.
Another difference between CDs and MMAs is that when customers open a new CD, they secure a fixed interest rate that remains valid for a specific term. In contrast, MMA APYs fluctuate, meaning the rate can increase or decrease unexpectedly.
Money Market vs. Checking Account
Like checking accounts, money market accounts allow customers to write checks, make internal and external transfers, and pay their bills. However, with a checking account, users have more flexibility in their usage of the account, such as unlimited monthly transactions, personalized checks, and a debit card for online or in-store purchases and ATM cash withdrawals.
How Is a Money Market Account Different Than a Money Market Fund?
Money market accounts are liquid and federally insured, paying an interest rate as low as 0.01% and up to 3.5% or more, depending on their financial institution. Customers prefer MMAs because they offer high-interest earnings, more liquidity, and checking privileges.
The FDIC doesn’t insure money market funds, although liquid investments are relatively secure and low-risk. They usually hold U.S. Treasury bonds and invest instruments such as cash and debit-based securities. While they aren’t interest-bearing, they have short-term maturation and minimal credit risk. One downside to a money market fund is that it doesn’t have check-writing privileges and access to debit cards.
A money market account is ideal for customers looking for a high-interest savings option with multiple transactional options. It has checking capabilities that allow account holders to withdraw funds without facing a penalty.
While money market accounts are inconvenient for some users, they provide more security and higher monetary growth than basic savings accounts. They also offer flexibility and easy access for customers needing emergency cash, as long as they follow federal insurance limitations and guidelines.
Learn more at amerantbank.com and view Amerant Bank’s Savings and Money Market Account options: www.amerantbank.com/savings/.