For your short-term savings, such as your emergency fund or vacation fund, a can be a good alternative to a traditional checking or savings account. Money market accounts usually have a higher annual percentage yield (APY), so your money can grow faster.
How often do money market accounts pay interest? Although it can vary by bank, money market accounts usually compound interest daily and credit the interest to your account on a monthly basis.
Continue reading to learn more about money market accounts and interest and how to maximize your cash.
Do money market accounts earn interest?
Money market accounts are deposit accounts you can open with a bank or . You deposit money — either a one-time lump sum or with recurring deposits — into the account, and, in return, the bank pays you interest. The rate of interest you earn over a year is reflected in the account’s .
In general, money market accounts have higher APYs than . Nationally, the average APY on money market accounts was 0.66% as of April 15, 2024 — about 44% higher than the average rate for savings accounts (which is currently 0.46%, per the FDIC).
How often do money market accounts pay interest?
As an interest-bearing account, your money can earn interest in a money market account. The interest is , meaning you earn interest on the money you deposit and the interest accrued as you save.
Although interest structures can vary by bank or credit union, money market accounts usually compound interest daily, so the amount of interest you earn grows every day. However, the interest is only credited to your account — reflected on your account balance — monthly.
For example, say you open a money market account with a 3.00% APY and deposit $1,000. Interest compounds daily but is credited to your account at the end of the month. In this example, $2.50 of interest would be credited to your account at the end of month one. For the second month, interest is compounded based on the new, higher amount of $1,002.50.
Below is how interest would accrue over the course of six months:
You can use the from Investor.gov to find out how much you can earn in interest based on your account’s APY and deposits.
How much will $10,000 make in a money market account?
Although the average APY for money market accounts is just 0.66%, it’s possible to find accounts with significantly higher rates. In fact, the offer rates as high as 5.30%.
How often do money market accounts pay interest? Here is how much you could earn on $10,000 in a money market account vs. a , assuming interest is compounded daily and credited monthly:
By opting for a high-yield money market account rather than a traditional savings account, your money can work much harder for you. After 10 years, your $10,000 deposit would grow to $16,111.78 — more than $6,500 more than you’d have in a traditional savings account.
What are the downsides of money market accounts?
Compared to other options, such as investing in the stock market, which can be risky, the returns of a high-yield money market account can be appealing. However, there are some downsides to keep in mind:
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Monthly fees: Money market accounts often have . Depending on the bank, the fee can range from $0 to $25 per month; if the bank or credit union charges a fee, it can eat into your interest earnings.
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Deposit requirements: Money market accounts usually have higher minimum balance requirements than savings accounts. While many banks and credit unions allow you to open a savings account with $25 or less, money market accounts usually require a deposit of $1,000 or more. For those just starting out who don’t have a lot of cash available, meeting the minimum deposit requirement can be a challenging obstacle.
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Withdrawal limits: Although money market accounts allow you to access your money by withdrawing cash at an ATM or , some money market accounts have . Policies vary by institution, but you may be limited to as few as six withdrawals or transfers per month; if you make more than that number of transactions, the bank may charge you an excess withdrawal penalty.
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Interest fluctuations: Money market account interest rates are not fixed; they can change along with economic conditions, so the bank can adjust the rate at any time. The account could have a significantly lower rate in the future. (However, unlike a , your principal balance due to market fluctuations.) If you’re looking for an account with a locked-in rate, a (CD) may be a better choice.
Frequently asked questions (FAQs)
Is cash in a money market account safe?
Money market accounts are deposit accounts, so your money in the account is safe. If the money market account is opened with a federally insured bank, your money is protected by the up to $250,000. If you opened an account with a credit union, your money is protected by the National Credit Union Administration ().
Do you pay taxes on money market accounts?
Interest earned on a money market account is . If you earn $10 or more in interest in a calendar year, your bank or credit union will send you , which shows how much interest you earned. That amount must be reported on your taxes.
What is the minimum balance for a money market account?
For money market accounts, the minimum balance requirement varies by financial institution. In general, most banks require you to deposit at least $1,000 to open an account.