3 Possible Drawbacks of a Money Market Account

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MMAs aren’t always your best bet for every situation. 

Chances are, you know how checking accounts and savings accounts work. Your checking account is intended to hold money you’ll be using in the near term, such as the funds you need to pay your monthly bills. And your savings account is where you keep money in reserve for big goals you’ll be meeting in the next few years, like a home down payment, as well as extra cash for unplanned expenses. But if you’d like to earn interest on a pool of money you’re saving, as well as have easier access to it than you’d get from a typical savings account, you might consider opening a money market account (MMA).

MMAs come with some very cool features, including the ability to withdraw your money via check or debit card, as well as a higher annual percentage yield (APY) than you’d find on a typical savings account from a traditional bank. That said, there are a few things you need to know about money market accounts so you’ll be able to decide if one is a good place for your money.

1. You may need to maintain a minimum balance

Generally, you can open a high-yield savings account with any amount of money. The same may not be true of all MMAs, as some banks have a minimum balance requirement to open an account. In some cases, you may also have to maintain a certain minimum balance to qualify to earn the highest rate of interest being offered.

There are certainly plenty of MMAs without this requirement, however. So even if the account you’re considering has it, shop around and see if you can find another option that offers the APY you’re looking for and won’t penalize you for keeping less in the account.

2. The interest rates offered won’t beat inflation

While money market accounts (and indeed, high-yield savings accounts) are paying pretty generous interest rates these days, those rates aren’t high enough to beat the inflation we’ve all been living with. The Consumer Price Index Summary released Jan. 12, 2023 found that inflation was sitting at 6.5% over the previous year. Meanwhile, the best MMAs are paying around 4% interest right now, so the money kept in one is still losing some value to inflation. This is unfortunate, but it’s the price you pay for keeping money as easily accessible cash in a bank account, as opposed to investing it in the market for long-term growth.

If you currently have money in an MMA and it isn’t paying as much as the highest APY available, you might consider changing banks to get a better deal, but there’s not much any of us can do at this point to mitigate the effects of higher inflation by way of our bank accounts. Having your cash savings in an interest-earning account does help some, however (and it’s important not to lock your emergency fund up in the stock market, where it could lose value in the short term).

3. You may be limited in free withdrawals

Since an MMA gives easier access to your money than a savings account would, you may be thinking that you can take regular withdrawals from it like you would your checking account. Not so fast. MMAs (as well as savings accounts) are subject to Regulation D, a federal regulation that governs how many withdrawals you can make from these accounts. There has been some upheaval with this rule’s enforcement, however.

In April 2020, at the start of the COVID-19 pandemic, the Federal Reserve removed its requirement that account holders are limited to six “convenient” transactions per month. Convenient transactions include automatic and electronic transfers, check payments (as some MMAs do come with check-writing capabilities), and online banking transactions. As of this writing, the Federal Reserve hasn’t put the rule back in place, but some banks and credit unions are still enforcing it. So check with the bank where you’re considering opening an account to find out what its rules are for MMAs.

For this reason, don’t plan to use your new MMA as a checking account, as you could incur transaction fees or even have your account closed or converted into a checking account by your bank. Think of it as a super-charged savings account that gives you the option to access your money in a pinch — when you really need it. For this reason, a money market account can be a great place to keep your emergency fund.

Money market accounts are an interesting type of bank account with features of both checking and savings accounts. If you want to open one, consider all the possible drawbacks listed above to help you find just the right place for your money.

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