If you are like most people, you probably have a savings account in addition to your checking account. Typical checking accounts provide the flexibility to make deposits and withdrawals, pay bills, write checks and transfer funds electronically. A savings account adds the ability to draw interest on your money, providing a safe place for you to let your money grow. As such, a savings account is an incredibly important tool in providing financial stability and growth.

Perhaps you have wondered, though, why it is necessary to have separate checking and savings accounts? Why can’t the two simply be combined into one account to make your life a little easier? You may find the answer to that question in the form of a money market account.

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 It is similar to a savings account in the way that money can be deposited and withdrawn.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.

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