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What’s the Deal with Money Market Accounts?

    We’ll be the first to admit that money market accounts seem to have gotten less popular over the years. (This isn’t really the case; read on!) With interest rates dropping across the board, these accounts are often bundled alongside certificates of deposit (CDs) as “too low yield to even worry about.” Why put your money in the bank to earn a quarter of a percent when you can make 7% returns on the stock market?

    This logic might make sense on paper, but the truth is that money market accounts really aren’t unpopular. Record levels of American cash is being held in these accounts right now. That’s right; there’s over $5 trillion dollars parked in money market accounts as I write this.

    So, despite all of the negative words being slung at money market accounts, they must be doing something right.

    Where did money market accounts come from?

    Many years ago, the federal government put an upper-limit on the interest rates that banks could offer their customers.

    This was largely a move designed to protect the banks, which would have had a hard time staying above water if they had to pay out higher interest rates. Naturally, this strategy only had a limited life span.

    Customers got smart, and as the interest rates on everything else started rising in the 1980s, they started pulling their money out of the banks. Where were these customers turning? They were investing their cash in short-term debt securities called money market mutual funds.

    As the money flowed out of the banks, they started to run out of funds to lend. This forced Congress to pass the Garn-St. Germain Depository Institutions Act of 1982, a law that allowed banks to offer money market deposit accounts. These accounts would pay interest based on the “money market” rate, allowing the banks to compete with the mutual funds that were robbing them of customers.

    What made these money market accounts so different?

    Well, one advantage that the new money market account held over money market mutual funds was that they were federally-insured like bank accounts. They also created a sort of hybrid between a savings account and a long-term investment vehicle by giving both higher interest rates and access to the funds within.

    The access is limited, usually to 3-6 checks per month, but the benefit of liquidity is more than enough to attract many customers to the money market account option.

    What happens if you exceed that limitation? Well, if you consistently write more than 6 checks per month, the bank is required to take action. Most often, they will close your money market account and move the funds into a standard checking account.

    This sounds like an interest-bearing checking account with more limitations! What gives?

    In many ways, you’re right. A money market account is much like a interest-bearing checking account, although it still carries the higher APY at many banks.

    Depending on the institution, it’s possible that a standard savings account or checking account with interest might be better than their money market account options, but it’s up to you to explore those possibilities.

    Regardless of the changing times, money market accounts are still going strong. Many experts believe that the growing popularity of these accounts is simply a matter of safety. In an uncertain economy, money market accounts offer a secure place to stash your savings where you can watch it grow and still have some access to it.


    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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