If you’ve built up your cash reserves and simply have it all sitting in a traditional savings account, it may be time to reconsider how you’re storing your money. Opening a money market account is a step up from a savings account once you’ve accumulated a certain amount of cash.

savings

There are certain pros and cons with this type of account, so it’s important to understand what it is and how it works. You just might find that your money can better work for you when it’s in a more growth-oriented account such as an MMA. Ready to learn more?

What does a money market account do?

The most appealing aspect of opening a money market account, particularly compared to a savings account, is that it typically offers a higher interest rate. At the same time, it still provides you with the flexibility to access your money as you need it.

Money market accounts are FDIC-insured up to $250,000, so they’re considered a low-risk way to store your money, just like a regular savings account. If you open an account through a credit union, your funds are similarly insured by the National Credit Union Administration.

Depending on your financial institution, your interest can accrue daily, monthly, quarterly, or annually. The more frequent the accrual, the more money you’ll earn over time because of the effects of compounded interest.

To deposit cash into your money market account, you can use any method you use with other savings accounts, including electronic transfer. If your account is with a financial institution that has physical branches near you, you can also make cash and check deposits.

Another perk compared to a savings account is that you receive both a debit card and a checkbook that are linked to your account, allowing you to make withdrawals at your convenience.

This keeps your funds extremely liquid so you can quickly access them during a financial emergency. There are some limitations on how often you can make withdrawals, so keep reading to familiarize yourself with the restrictions that occur when you have a money market account.

Does a money market account have limitations?

While a money market account does offer a degree of flexibility, there are some restrictions as well. Most notably, you may not make more than six withdrawals each month. This is a federal rule, not one made up by the banks. You could receive a fine if you exceed this limit.

On top of that, you’ll start to receive formal warnings from your financial institution. If you continually exceed the withdrawal limit after being warned, the bank is eventually required to move your funds into a checking account, so be aware of your behavior and plan accordingly.

Another restriction imposed by some banks (but not necessarily all of them) is an account minimum. Many require that you open an account with at least $10,000. On top of that, you may also be required to maintain a certain balance threshold. If you don’t, you could again be subject to a fee from the bank.

If you don’t meet the minimum to open an account but still want one, you may be able to pay a monthly fee to bypass the deposit minimum. Just check to make sure it’s worth it.

There’s no sense in paying an expensive fee that exceeds the interest you accrue each month. If that happens, you’re probably better off keeping your cash in a free savings account or other similar product. Take the time to do the calculations to know exactly how much you’re earning (or paying) to determine if the money market account makes financial sense for your funds.

Is a money market account right for you?

There are a lot of factors involved in whether or not a money market account is right for you. Start off by looking at your holistic financial picture. Do you have a healthy buffer in your checking account or other savings account?

Money markets are often used for savings that don’t need to be accessed regularly, so make sure you have cash stored somewhere if you need it more frequently. Once you start to save on a larger scale, you can consider opening a money market account.

Another thing to think about with a money market account is how competitive the yield rate stands. Years ago, MMA rates were much more competitive than a standard savings account. But today, interest rates across the board are extraordinarily low.

money market rates

While this is great if you’re borrowing money, it’s not so great when you’re trying to save money and benefit from a high yield. Many money market accounts today are below 1% and are oftentimes even less than that. It’s definitely worth some research to determine which banks are currently offering the better rates.

The bottom line is that a money market account does have its limitations. If you can’t meet the minimum threshold without paying a fee or you need to withdraw your funds frequently throughout the month, then you might look for another type of account.

But if you want to diversify your savings while still receiving a nominal return, then consider a money market account. It’s low-risk and easy to access, so you get that flexibility to make withdrawals when you need to — just not every day.

What are the best money market accounts for 2017?

Check out our in-depth guide to 2017’s best money market accounts. There’s a great variety of banks offering different minimum deposits and some of the most competitive APYs on the market. Here is a brief overview of each of our top picks to help get you started.

AbleBanking Money Market Account

This is a money market account with a low minimum deposit of just $250. Paired with a 1.0% APY, it’s ideal for beginning savers. An added bonus is that you get same day transfers if you have another AbleBanking account.

Ally Bank Money Market Account

Ally offers a money market account with 0.85% APY and daily compounding interest. And unlike most MMAs, there’s no deposit minimum, no monthly fee, and the APY applies to all balance tiers.

Bank of Internet Money Market Account

The APY here is a bit lower at 0.75%, but Bank of Internet also has no minimum opening deposit and no requirement for ongoing balances. It’s a great choice if you’re just beginning to start your longer-term savings.

EverBank Money Market Account

With one of the higher APYs, money market account holders at EverBank earn 1.1% for the first year. To qualify, you need a $1,500 initial deposit from a non-EverBank account. After the first year, your interest rate drops to just 0.61%.

Capital One 360 Money Market Account

Your APY varies here depending your deposit amount. You’ll receive a rate of 0.6% APY up to $10,000. Once you hit that threshold, it jumps to 1.0%.

Sallie Mae Money Market Account

With no minimum deposit with an MMA from Sallie Mae, you can earn a 0.9% AP on your funds. They also have a slightly more flexible overdraft policy compared to other financial institutions.

Santander Money Market Account

Santander’s MMAs are better designed for account holders with at least $10,000, in which case you’ll earn between 0.8% and 1.0% APY. With less than that, you’ll have to pay a monthly fee plus only earn 0.1% APY.

What are alternatives to a money market account?

While a money market account can be a great savings tools, it’s smart to familiarize yourself with similar options. A savings account usually offers less interest than an MMA, but this isn’t always the case — it really depends on the financial institution.

A savings account doesn’t let you write checks like a money market account does, but you don’t generally need a minimum deposit. Both types of account are considered low risk and insured by the FDIC up to $250,000. They also have the same withdrawal restrictions of up to six times per month.

Another comparable product is a certificate of deposit, or CD. The savings rate with a CD is generally higher than that of a money market account, but here’s the catch: you have to commit to a certain time frame before withdrawing funds from a CD.

Unlike an MMA, you’ll receive a penalty for making a withdrawal from your CD before the term matures. You can choose your term length, typically lasting between six months and five years.

While placing funds in a CD could certainly be a part of your savings strategy, it’s not meant to replace liquid cash assets. You probably shouldn’t put any money in a CD that you would expect to need before the maturity date. But the longer term you commit to, the more interest you can expect to earn, so there are definitely merits involved as long as you have a holistic savings plan.

Is a money market account the same thing as a money market fund?

These two financial products are actually completely different, so be careful not to confuse a money market account (MMA) with a money market fund (MMF). While an MMA serves as a low-risk account for savings, an MMF is an investment in a mutual fund, which is typically done through a broker.

While an MMA is insured by the FDIC, an MMF is not. There’s no guarantee that you’ll even receive back your entire principal, let alone any earnings. Still, they are low-risk on the spectrum of investments, but there’s no financial safety net in terms of insurance.

So what exactly do money market funds invest in? Most commonly, they focus on U.S. Treasury bills, commercial paper, and other short-term debt securities. These aren’t turbulent investments by any means, and they’re starting to see higher yields as the Federal Reserve begins to raise rates.

But like all savings vehicles these days, savers aren’t seeing dramatic differences among many of these products. Whether you’re considering a money market account or anything else, be sure to check on exactly what terms the financial institution is offering and don’t be afraid to shop around.

If you’ve been saving since before the recession of the mid-2000s you might remember APYs that actually made you a decent return. But today’s markets are different as the country still sifts through economic recovery. For all savers, that means taking a closer look at what kind of interest you can expect to receive.

It also means making sure you don’t actually end up losing money by paying hefty fees or tying up money in low-yield accounts with too many restrictions. In many cases, a money market account could be the next step up in your overall savings plan.