Money Market Accounts (MMAs): Features, Benefits & How They Work

A money market account (MMA) is a type of savings account that features the traits of a checking account – namely, it comes with checks and/or a debit card and the ability to complete a few transactions monthly without incurring bank fees.

The Federal ReserveFederal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy., however, still classifies money market accounts as “deposit accounts” (according to Regulation D), meaning no more than six transactions are allowed each month. However, withdrawals from tellers and ATMs don’t count toward the transaction limit.

Understanding Money Market Accounts

Money market accounts – commonly referred to as MMAs – come with insurance. It means that if the financial institution utilized goes bankrupt or completely shuts down, none of your deposits will be lost.

For credit unions, MMA insurance is provided by the National Credit Union Administration (the NCUA). MMAs at banks are insured by the Federal Deposit Insurance Corporation (the FDIC)Federal Deposit Insurance Corporation (FDIC)The Federal Deposit Insurance Corporation (FDIC) is a government institution that provides deposit insurance against bank failure. The body was created, just like other deposit accounts.

One of the most common reasons that an individual may choose to use a money market account over a straight savings or checking account is because MMAs tend to offer a higher rate of interest. The higher rate, though, generally requires a higher minimum deposit to qualify and may require maintaining a minimum balance as well.

Summary

A money market account (MMA) is a short-term deposit account that enables you to earn a slightly higher interest than traditional savings accounts.

• Certificates of deposit (CDs) tend to offer considerably higher APY versus MMAs; however, they keep your money locked in place for a minimum of one year.
• High-interest checking accounts may offer a significantly higher APY than MMAs, but they come with more requirements, including active management.

More on the Matter of Interest

Let’s explore the area of interest a little further, more specifically, how the interest rates – often referred to as annual percentage yield (APY)Annual Percentage YieldThe annual percentage yield (APY) is a normalized interest rate based on the compounding period of one year. The APY provides a standardized representation of the underlying interest rates of financial products. – on MMAs compare to interest earned in other types of deposit accounts.

As of May 2020, the national MMA interest rate for banks in the United States was 0.15%. It means that if you were to deposit, for example, $20,000 into your MMA, you would earn $30 in interest after the first year.

Let’s compare that to the average annual interest earned on a traditional savings account. In years past, the APY for straight savings accounts was substantially lower, around 0.06%. In 2020, the APY sits at around 0.10%. It means that if you were to put $20,000 into a traditional savings account, you would earn $20 after the first year. While neither amounts to a huge sum, you would receive a slightly higher yield with an MMA.

Certificates of deposit (or CDs) typically offer some of the highest deposit account yields, with the averages sitting around 0.40% or 0.60% (for 1- or 2-year CDs, respectively). The downside with CDs, however, is that your money is locked in for a minimum of 1 to 2 years.

Traditional savings accounts and CDs do not provide check-writing privileges or options for withdrawal – without substantial penalties in the case of CDs – so money market accounts offer liquidity advantages.

As with any account you choose to open, rates and minimum deposits are going to vary – both by the area of the country you are in and the institution you choose to use. It is best to shop around for the best rates. If you don’t need to visit a brick-and-mortar location, there are often better money market account interest rates to be found with online banks, such as Ally.

A Money Market Account Alternative

If you’re looking for a short-term place to store some of your money without the hassle of active management, MMAs are a great option. They do, of course, come with the following limitations:

• Higher minimum deposits
• Limited monthly transactions

If, however, you’re interested in a higher yield and an essentially unlimited number of monthly transactions, a high-interest checking accountChecking AccountA checking account is a type of deposit account that individuals open at financial institutions for the purpose of withdrawing and depositing money. Also known as a transactional or demand account, a checking account is very liquid. To put it simply, it provides users a quick way of accessing their money. may be a better option. The good news? The average APY on high-interest checking accounts for 2020 is around 3.5%. However, it is typically the uppermost limit on interest offered.

Additionally, deposit amounts and, therefore, the amount of total annual interest you can earn are capped. The cap is different for each provider and region, ranging anywhere from as high as $25,000 to as low as $1,000.

High-interest checking accounts come with all the perks of most traditional checking accounts. The downside is that you need to meet several requirements, which often include:

• Signing up for electronic statements
• Setting up direct deposit into the account
• Performing a set number of minimum monthly transactions to keep the account open
• Maintaining a minimum monthly account balance (and juggling account minimums with account maximums can get confusing)

It is best to explore high-interest checking account rates and requirements from different providers and weigh them against MMAs and CDs, as well as traditional checking and savings accounts, to see which option will work best for you.

More Resources

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In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

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