Money Market Accounts Are Finally More Competitive. Should You Get One?

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“More competitive” is a relative term. 

Key points

• While money market account APRs are on the rise, the interest rate won’t make you rich.
• If you don’t like rules, an MMA may not be right for you. 
• Today’s rates on high-yield savings accounts are surprisingly competitive with MMAs. 

If there’s one bright side to rising interest rates, it may be that interest rates rise across the board. For example, old-school money market accounts, easily opened at any brick-and-mortar or online bank, are now enjoying slightly higher interest rates. But does that mean it’s time for you to get one? Here we take a look at MMAs and your other options.

What is a money market account?

A money market account (MMA) is a type of savings account. Like a typical savings account, it is federally insured, meaning you can never lose money. The advantage of an MMA is that it normally pays a higher interest rate than a high-yield savings account. That higher interest rate allows you to grow your money faster.

When your money is tucked away in an MMA, you can withdraw funds when you need them. That fact alone makes an MMA a good place to keep the money in your emergency savings account. When needed, funds can be drawn via electronic transfer. Some banks and credit unions also offer MMA checks or debit cards.

MMAs are not without downsides, though. Here are two of them:

• Your financial institution may require that you keep a higher minimum balance in an MMA than required for a savings account. If you can’t maintain that balance, you may not earn the promised interest rate.
• Federal law limits the number of withdrawals or transfers from an MMA to six per month. While ATM withdrawals and withdrawals made at a bank branch don’t count against the limit, electronic transfers and automatic bill pay do. If you go over the six-per-month limit, you’re required to pay an additional per-transaction fee.

Is now the time?

As of this writing, the average annual percentage yield (APY) on MMAs is capping out at between 3% and 4%, and you’ll only have access to the best rates if your deposit is relatively large. For example, the Discover Money Market account currently pays a APY that varies slightly by the size of your deposits: 2.90% (balances under $100k), 2.95% (balances $100k+).

In the meantime, if you’re looking for places where your money will grow at a faster rate, you might want to consider the following:

I bonds

Series I savings bonds are designed to protect you from inflation. To accomplish this, you’re paid a fixed rate of interest and a rate that changes with inflation. Twice a year, the Treasury Department sets the inflation rate for the next six months. While they are not FDIC-insured, I bonds are backed by the federal government.

As of this writing, I bonds are earning 6.89%.

High-yield savings accounts

While MMAs typically earn a higher APR than high-yield savings accounts, that’s not necessarily the case today. It’s relatively easy to find high-yield accounts paying between 3% and 4%. High-yield savings accounts are FDIC-insured.

Roth IRAs

If your goal is to save for retirement, a Roth IRA is a great way to pad your nest. While a Roth IRA does not offer an upfront tax deduction like a traditional IRA, you won’t have to pay taxes on the growth or withdrawals in retirement.

Investing in a broad market index fund that tracks the S&P 500 has historically earned annual returns of around 7% after adjusting for inflation. If you have enough time left before retirement to ride out both bull and bear markets, an IRA is likely to provide the biggest bang for the buck.

As with other investments, there are no guarantees, and you could lose money. 

MMAs are safe, dependable, and can be a good place to stash your emergency fund. The primary risk is the opportunity cost of not investing in a higher-earning financial vehicle.