What Is a Money Market Account?

A money market account, in its basic form, is a hybrid mixture of a savings account and a
checking account. It is similar to a savings account in the way that money can be deposited
and withdrawn. However, it typically pays a higher interest rate and includes the ability to
write a limited number of checks, similar to what you can do with a checking account.
Additionally, most money market accounts offer an ATM card, which gives you more
immediate access to your money than a regular savings account would.
Because a money market account acts like a hybrid in that it provides some of the features of
a checking account as well as a savings account, it potentially could replace both. However,
before you decide to do away with your savings and checking accounts, you should know that
money market accounts typically require you to maintain a larger balance, plus the number of
checks you are allowed to write during a given time period is limited.
Money Market Account vs. Savings Account
There are similarities in money market accounts and savings accounts, but there also are
distinct differences. For one thing, money market accounts typically pay a higher interest rate
than savings accounts. There are three reasons for this:

1. Financial institutions that provide money market accounts have more freedom in how
they invest deposit proceeds. This allows them to invest in short-term securities with a
higher return on investment (ROI), such as government securities, certificates of
deposit (COD), and commercial paper.
2. Money market funds typically require a larger balance to be maintained, giving the
financial institution more money to invest and, therefore, to make more profit.
3. Money market funds are restricted as to the number of checks that can be written
during a specified time period, which reduces the expenses of the financial institution

Money market funds also provide more immediate access to funds than savings accounts do.
In addition to being able to write checks, most money market accounts come with an ATM
card that can be used as a debit card to make purchases and cash advances. On the down
side, money market accounts typically require that you maintain a higher balance than is
needed for a savings account. If you fall below that minimum balance, you may incur some
fees.
While individual needs vary, a money market account may be the best choice for someone
who has a larger amount of money to save and who wants to earn more interest on their
savings in order to see their money grow. Conversely, a regular savings account may be
better for a person with less money to save or a person who needs to keep a checking
account for other purposes. Additionally, if ready access to funds makes it too tempting to
spend money, a person may be better off with a traditional savings account.

Pros and Cons of Money Market Accounts

Pros

1. Money market accounts typically earn a higher interest rate than passbook and regular
savings accounts do. This is one of the primary advantages of a money market
account, as your money can grow much more quickly than it could in a regular savings
account.
 2. A money market account is insured up to $250,000 by the Federal Deposit Insurance
Corporation (FDIC). This means that you can invest without much risk, unlike the stock
market. In a similar fashion, money market accounts at a credit union are insured by
the National Credit Union Administration.
3. Money market accounts typically come with an ATM card that can be used as a debit
card. This makes it convenient to make purchases and pay bills as well as to make
cash withdrawals.
4. Unlike regular savings accounts, you can write a limited number of checks on a money
market account.
5. Operating out of one money market account is much more convenient that having both
a savings and checking account.

Cons

1. Money market accounts are restricted as to the number of checks that you can write
during a designated time period. Thus, a money market account is not as liquid as a
checking account.
2. Money market accounts require a larger opening balance than savings accounts.
Although this amount varies significantly from one financial institution to another, a
typical amount might be around $2,500. If your balance falls below the established
minimum, you may have to pay some fees.
3. Some financial institutions charge fees on money market accounts that are not charged
on regular savings accounts. These fees have to be weighed out to determine if a
money market account is the best choice for an individual.
4. Although it is usually viewed as an advantage, ready access to money parked in a
money market account may be too tempting for some people who have trouble
controlling their spending habits. For those individuals, a regular savings account may
be a better answer.
5. Although money market accounts have advantages, they are not as convenient as a
regular checking account.

Your particular circumstances will determine whether you could benefit by opening a money
market account or not. Before you make that decision, you owe it to yourself to do some
additional research in order to find out if a savings account or a money market account is the
best option for you.