Opening a money market account can help you accomplish your short-term savings goals, and finding a money market account, often called an MMA, with a high annual percentage yield (APY) can help you maximize your efforts. When you use an MMA, you often earn a higher interest rate than you would in a traditional savings account, and you have access to your funds the way you would if you kept that money in a checking account.
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Types of money market accounts: Traditional vs. high-yield
As with savings accounts, there are two types of MMAs: traditional and high-yield accounts. Traditional money market accounts offer relatively low interest rates, albeit better than most traditional savings accounts on average.
In contrast, high-yield money market accounts offer interest rates that are much higher than traditional money market accounts. That said, they may or may not offer higher APYs (percentage of growth earned through compound interest over one year) compared to some high-yield savings accounts.
Read more: What is a money market account?
How to find the best money market account
While it may be tempting to open a money market account with the bank you already have a relationship with, take your time to shop around and compare APYs from multiple sources to ensure you get the best offer available.
For the most part, online banks offer the best money market account rates. But you can also find solid options with state and federal credit unions, and even some traditional banks.
Run a quick search online for the best money market accounts, and several resources will pop up to help you compare the top options available.
In addition to interest rates, fees, initial deposit amount needed, and balance requirements, check to see if you’ll have easy access to your money market funds.
Read more: How to open a money market account
How do money market accounts work?
Of course, there’s a little more to MMAs than traditional savings or checking accounts that go beyond the differences in interest rates and access. You’ll also want to get clear on associated fees, insurance and the balance requirements for these specialized accounts that define their whole methodology. Here’s a breakdown of how money market savings accounts work, along with some of the most common account features:
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Interest: You can expect to earn interest on your balance, typically at a higher rate than traditional checking and savings accounts. That said, interest rates can vary depending on the financial institution and the type of money market account you choose. Also, some financial institutions may offer tiered rates based on your balance.
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Quick access to funds: Like a checking account, you can typically access your money using a debit card, an ATM card, logging into your account online, or via bank transfer. MMA accounts also often offer check-writing privileges. That said, account holders may be limited to six monthly withdrawals, a feature often shared with savings accounts. After that, your bank or credit union may charge an excessive withdrawal fee or even decline your requests.
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Fees: Like checking accounts, some money market accounts charge fees, including monthly fees and ATM fees, though thos fees may be waived if you meet certain criteria.
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Insurance: Like other deposit accounts, the funds in your money market account are typically federally insured, either through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). An NCUA- or FDIC-insured MMA will be covered up to $250,000.
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Balance requirements: Minimum balance requirements can vary, but in some cases, you may need to meet a certain minimum balance or initial deposit requirement to avoid a monthly fee or earn interest.
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Understanding yield
Money market accounts offer interest on your deposits, either at a set rate regardless of your balance or on a tiered basis, with various rates based on your balance.
But like other interest-bearing bank accounts, MMAs compound the interest you earn, typically daily, and pay it out monthly. Compounding interest increases your yield because interest accrues not only on your principal balance but also on the interest accumulated since the last time you were paid.
For example, if you have a $10,000 balance in an account with a 4% interest rate, you’d earn roughly $1.10 in interest on Day 1. On Day 2, the bank or credit union will apply the same interest rate to a balance of $10,001.10 instead of $10,000.
Because of compounding interest, the APY on your account will be higher than your interest rate. To calculate APY, you’ll use the following formula:
In this equation, “r” is the account’s annual interest rate in decimal form, and “n” is the number of compounding periods in a year.
APY example
Let’s say you have a money market account that earns a 4% interest rate and compounds interest daily. To calculate the APY for the account, fill out the equation as follows (note that you’ll likely need a calculator for the exponen)t:
While the APY typically isn’t much higher than the interest rate, it can give you a more accurate idea of what you can expect to earn on your deposits.
Factors affecting money market yields
Several factors will impact how much you earn in a money market account. Here’s what you can expect and how to compare account options:
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Interest rates: Money market account interest rates are variable and can change at any time based on market conditions — the highest APY available now may be lower or higher in the future, depending on the Fed. Additionally, with some financial institutions, your MMA rate may vary depending on how much money you have in the account.
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Balance: The account’s interest rate will be applied to your balance, so as your balance grows, so will the amount of interest you earn. Keep in mind that some financial institutions require you to maintain a minimum balance to earn interest.
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Account fees: Some banks charge monthly maintenance fees on their money market accounts, which eat into your yield. In some cases, though, you may be able to get the fee waived if you maintain a certain balance. Many financial institutions also charge an excessive withdrawal fee if you withdraw money more than six times in a month.
As you compare your money market account options, consider whether the accounts you’re considering have a flat or tiered rate structure and how often interest compounds. You’ll also want to look for minimum opening deposit and ongoing balance requirements.
Finally, make sure you know what fees each account charges. If it’s possible to waive the monthly service fee, determine whether you can meet the requirement to earn the waiver.
Tips for maximizing money market yields
Depending on your situation, you may be able to take advantage of different opportunities to make the most of your short-term savings. Here are just a few to consider:
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Automate your savings: Instead of saving money that’s left over at the end of the month, incorporate your savings into your budget to ensure you’re saving the amount you want each month.
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Choose the right account for your balance: If you have a sizable savings balance, you may earn a higher APY with a bank or credit union offering higher yields on larger deposits.
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Take advantage of promotional offers: It’s not common for banks to offer promotional APYs on money market accounts, but still watch out for them as you shop around. Just make sure you read the fine print for the offer to understand how long the promotion lasts and the potential limitations.
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Minimize your fees: If you can find a money market account with a high APY and no monthly fee, you’ll need to make sure you limit your withdrawals if there’s a withdrawal limit in place. However, if the account you want charges a monthly fee, consider whether you can get that fee waived each month if you keep a higher minimum balance.
Risks and considerations
While money market accounts can be a great place to stash short-term savings, there are some potential pitfalls to watch out for:
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Your earnings won’t outpace inflation: While some of the highest-yielding money market accounts can beat out a high-yield savings account, they typically don’t offer a high enough APY to compensate for inflation. As such, they’re typically not the best option for long-term financial goals.
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Repeatedly exceeding your withdrawal limit could create greater consequences: You may not be concerned about an excessive withdrawal fee here and there. But if you exceed your monthly withdrawal limit regularly, your bank or credit union could decline your withdrawal requests or even close your account.
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Insurance coverage has limits: Like other bank accounts, money market accounts are safe and typically come with protection in the event that your bank or credit union fails. Both the FDIC and NCUA offer $250,000 in coverage per institution, per depositor, per ownership category. That should cover most people, but individuals with high net worths may need to spread out their funds across multiple institutions to maximize their protection.
As you consider these potential risks, shop around and compare other types of banking products, including the best high-yield savings accounts and certificates of deposit, to determine which one best fits your personal finance goals.