Advantages & Disadvantages of Money Market Accounts

Money market deposit accounts are a type of account offered at banks, credit unions and other financial institutions. These accounts are best for people who are putting aside money for a year or more but cannot afford to risk losing the money. For example, if you are saving for college expenses or a car purchase coming up in two years, a money market deposit account would be an appropriate investment. However, if you need access to your money on a regular basis a checking account would be better.

A disadvantage of money market deposit accounts is the high minimum balance requirements in order to avoid fees. Money market accounts usually require an average balance of at least $5,000. This is significantly higher than a savings account, which can have an account minimum as low as $50.

Money market accounts are insured by the Federal Deposit Insurance Corporation for up to $250,000 in case the financial institution fails. This makes money market deposit accounts as secure as money that is put in a saving account, checking account or certificate of deposit. This insurance makes the money market accounts more secure than stocks and mutual funds because those investments have nothing that prevents the investor from losing their entire investment.

Money market deposit accounts have one of the highest rates of return for FDIC-insured accounts along with certificates of deposit. Money market deposit accounts are often tiered, meaning the more money that you have in the account the higher the rate of interest that is paid. However, a disadvantage of the interest rates on money market deposit accounts is that it will not match the potential rates of return on riskier investments like stocks.

Money market deposit accounts are fairly liquid accounts, meaning the money can be accessed fairly easily. They are more liquid than certificates of deposit because there is no maturity date on the account. Because of their higher minimum balance requirements, they are not quite as liquid as savings accounts. However, a disadvantage of a money market deposit account is that it is not as liquid as a checking account because you can only write three checks per month, but it is much more liquid than stocks and bonds that must be sold or cashed in before you can use the money.

Money market deposit accounts do not have any monthly maintenance fees as long as you meed the minimum balance requirement. If you exceed monthly check writing limits you will have to pay a fee. However, unlike mutual funds, you do not have to pay a fee for the financial institution managing the account.