What are Money Market Accounts, Anyway?

If you don't already have a money market account, you may think it sounds like something mysterious and complicated. What are money market accounts, anyway? Well, we're going to break it down for you. And don't worry, they're not mysterious or complicated, and they can have tremendous benefits for consumers for the long haul.

Money Market Accounts Defined

Think of money market accounts, or MMAs, as combination checking and savings accounts. They take your money, pay a market interest rate, and hold it in an account that you can easily access. They deliver the best of both worlds because they pay higher interest than traditional savings accounts, but still give you the flexibility to write a limited number of checks each month. How much interest are we talking about? That depends on the bank and the specific account, so it varies.

Why They Exist

Years ago, the federal government used to cap the amount of interest banks could offer to customers for their savings accounts, limiting competition and forcing banks to get creative to win clients. But when these capped rates didn't keep up with the market in the '80s, customers moved their money to investment accounts that could earn a higher rate of return. That was bad for the banks because they lost customers and deposits, and since these short-term debt securities were not federally insured, it wasn't necessarily a great situation for consumers, either.

So, in 1982, Congress passed a law that let banks offer money market accounts that can pay interest at the market rate, helping them keep customers who want to earn a greater return on their money but still have access to it.

How Money Market Accounts Work

People like for their savings accounts to earn more than a few cents a month, so money market accounts are attractive because they pay higher interest rates. People also like to have access to their money if they have a sudden need, and this is more difficult with investments like stocks, bonds, and real estate. If they can't access their funds, they can turn to resources for cash advances and other types of loans. Money market accounts provide limited check writing power, three to six checks per month, depending on the account. So, your money is available if you need it, but it's not meant to be your checking account. If you write too many checks, your bank will be forced to move you into a regular checking account.

The Future

Money market accounts hold trillions of dollars of cash in the United States, and these accounts are federally insured in case of bank failure. That's a big bonus for consumers. While some banks have started offering higher rates of interest for checking and savings accounts, money market accounts remain a great option for keeping your money safe and available in a cash crunch. 

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