A money market account (MMA) can be a good alternative to a traditional checking or savings account if you want to earn competitive interest on your savings while maintaining access to your funds. The best money market accounts come with benefits such as a debit card and check-writing capabilities, and currently pay 3%-4% APY on your balance.
Further, the more often MMA interest compounds, the faster your balance will grow. So, how often do money market accounts pay interest? It can vary by bank — here’s what you should know to maximize your interest earnings.
Money market accounts are deposit accounts you can open with a bank or credit union. You deposit money — either a one-time lump sum or with recurring deposits — into the account, and in return, the bank pays you interest. The rate of interest you earn over a year is reflected in the account’s annual percentage yield (APY).
In general, money market accounts have higher APYs than savings accounts. Today, the national average money market account rate is 0.59%, while the average rate for savings accounts is 0.4%, according to the FDIC. However, it’s possible to find MMAs that pay five to six times the average.
As an interest-bearing account, your money can earn interest in a money market account. The interest is compounded, meaning you earn interest on the money you deposit and the interest accrued as you save.
Although interest structures can vary by bank or credit union, money market accounts usually compound interest daily, so the amount of interest you earn grows every day. However, the interest is only credited to your account — or reflected on your account balance — monthly.
For example, say you open a money market account with a 3% APY and deposit $1,000. Interest compounds daily but is credited to your account at the end of the month. In this example, $2.47 of interest would be credited to your account at the end of the first month. For the second month, interest is compounded based on the new, higher amount of $1,002.47, resulting in $2.48 in monthly interest earnings, and so on.
Below is how interest would accrue over the course of one year:
Although the average rate for money market accounts is just 0.59%, it’s possible to find accounts with significantly higher rates. In fact, the best money market accounts offer rates as high as 4% or more.
Here is how much you could earn on $10,000 in a money market account vs. a traditional savings account, assuming interest is compounded daily:
By opting for a high-yield money market account rather than a traditional savings account, your money can work much harder for you. After 10 years, your $10,000 deposit would grow to $14,917.92 — over $4,500 more than you’d have in a traditional savings account.
Compared to other options, such as investing in the stock market, which can be risky, the returns of a high-yield money market account can be appealing. However, there are some downsides to keep in mind:
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Monthly fees: Money market accounts often have monthly fees. Depending on the bank, the fee can range from $0 to $25 per month; if the bank or credit union charges a fee, it can eat into your interest earnings.
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Deposit requirements: Money market accounts usually have higher minimum balance requirements than savings accounts. While many banks and credit unions allow you to open a savings account with $25 or less, money market accounts usually require a deposit of $1,000 or more. For those just starting out who don’t have a lot of cash available, meeting the minimum deposit requirement can be a challenging obstacle.
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Withdrawal limits: Although money market accounts allow you to access your money by withdrawing cash at an ATM or writing a check, some money market accounts have withdrawal limits. Policies vary by institution, but you may be limited to as few as six withdrawals or transfers per month; if you make more than that number of transactions, the bank may charge you an excess withdrawal penalty.
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Interest fluctuations: Money market account interest rates are not fixed; they can change along with economic conditions, so the bank can adjust the rate at any time. The account could have a significantly lower rate in the future. (However, unlike a money market fund, your principal balance can’t lose value due to market fluctuations.) If you’re looking for an account with a locked-in rate, a certificate of deposit (CD) may be a better choice.
Money market accounts are deposit accounts, so your money in the account is safe. If the money market account is opened with a federally insured bank, your money is protected by the FDIC up to $250,000. If you opened an account with a credit union, your money is protected by the National Credit Union Administration (NCUA).
Interest earned on a money market account is taxable as income. If you earn $10 or more in interest in a calendar year, your bank or credit union will send you Form 1099-INT: Interest Income, which shows how much interest you earned. That amount must be reported on your taxes.
For money market accounts, the minimum balance requirement varies by financial institution. In general, most banks require you to deposit at least $1,000 to open an account.
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