How Do Money Market Accounts Work?

Banks offer a variety of options for our everyday banking needs and to help us save. While one option—the checking account—gives us the ability to make deposits, multiple cash withdrawals, make purchases, write checks, and do transfers, the savings account gives us a risk-free place to put our cash while the balance collects interest. But is there a happy medium? There is one type of account that offers the best of both worlds: The money market account. But just what exactly is this type of account and how does it work?

Key Takeaways

  • A money market account is neither a checking nor a savings account but has certain characteristics similar to both.
  • Money market accounts allow account holders to make withdrawals and transfers and debit card transactions like regular checking accounts.
  • MMAs offer higher interest rates than traditional savings accounts.
  • Account-holders are limited to six withdrawals per month and have a minimum balance requirement.

A Short History of Money Market Accounts

Banks created money market accounts (MMAs) to offer more competitive interest rates than those offered by traditional savings accounts. But that doesn't come without a cost. The tradeoff for higher rates is often a higher minimum deposit requirement. With many MMAs, the account has to maintain a minimum daily balance to receive the highest available interest rate. Many MMAs have tiered savings levels that offer higher interest rates for higher levels of savings.

MMAs became popular during the 1980s, when interest rates rose into the double digits, giving depositors an opportunity to generate high, risk-free returns. Investing deposits for MMAs are often held in vehicles such as certificates of deposit (CDs), government securities, and commercial paper that offer higher yields than are generally found in savings accounts.

Checking or Savings?

There tends to be some confusion about what a money market account actually is. An MMA is neither a checking nor a savings account. But it does have certain characteristics that are similar to both. Money market accounts usually offer higher yields than savings accounts. They are able to offer a more attractive interest rate by setting higher minimum balance requirements, and through restrictions on the number of withdrawals that can be made over a given period of time.

A money market account is neither a checking nor a savings account, but shares certain characteristics that are similar to both. 

Similarities to Checking Accounts

MMAs are deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC). They are offered by banks, credit unions, and other financial institutions like those that operate online. An MMA has several benefits that offer benefits that resemble a checking account.

First, some money market accounts offer debit cards. This allows account holders to make cash withdrawals or purchases at retailers using the card. If the institution offers online banking privileges, customers can also make transfers and pay bills the same way they would with a checking account.

Savings Element

While it has some elements of a checking account, the main point of an MMA is the savings portion. This means the account balance earns interest. Unlike a traditional savings account, account holders generally enjoy a higher rate. Many MMAs offer interest based on a tiered balance—lower balances get a lower rate, while higher balances are rewarded with more interest.

Institutions can justify the higher interest rate by putting a minimum balance requirement. If the account holder's balance goes under this amount, the bank may be able to cut the high-interest rate down. Banks can also charge fees for not meeting the minimum balance.

Like other savings instruments, money market accounts come with withdrawal limits. Account-holders are limited to six withdrawals per month by the Federal Reserve's Regulation D. If more than six withdrawals occur in a month, the bank may charge a fee or change the account status to a non-interest-bearing checking account.