How Liquid Are Money Market Accounts?

Money market accounts are considered a liquid way to save money, meaning you can quickly access your funds to use for other purposes. Aside from a checking account, money market accounts may be the most liquid savings vehicle.

However, if you have other goals, such as maximizing returns, you may want to weigh the benefit of money market accounts against investing in other assets. Learn more about the advantages and disadvantages of socking away cash in money market accounts, including more about their liquidity.

Along with checking accounts and savings accounts, money market accounts are one of the most liquid places to park your money. However, there are downsides to consider with this type of account. Depending on your other investing goals, a money market account could be ideal or other assets could be a potentially better fit for your portfolio.

Money market accounts, or money market deposit accounts (MMDAs), are considered a safe place for your funds because they are insured for up to $250,000 per account by the Federal Deposit Insurance Corp. (FDIC). That means if your financial institution fails, you will not lose your money up to that amount.

When you allocate your investments, you'll likely be considering a range of factors, including your risk tolerance, personal financial situation, and investing goals. Many financial advisors recommend setting aside at least three months' worth of expenses in an emergency fund, which should be money you can easily access and convert into cash.

How Money Market Accounts Work

A money market account is a deposit account held at a bank, credit union, or other financial institution. This account pays interest that is generally higher than the average savings account offers. Banks use the money in a money market account to invest in short-term liquid assets including Treasury bills (T-bills) or municipal bonds. Banks earn interest on these investments and, in effect, split the interest with account holders.

Making a withdrawal from a money market account is as simple as withdrawing funds from any other deposit account. Many money market accounts come with debit cards and the ability to write checks. Most allow unlimited withdrawals or transfers via ATMs or in-person visits to the bank or credit union.

Although they may share some similarities to standard checking and savings accounts, money market accounts do come with certain restrictions that make them less flexible. They may come with minimum balance requirements, a limited number of withdrawals, and fees and other charges.

Money Market Accounts and Liquidity

Except for certain limits on the availability of recently deposited funds, money market account deposits are available for immediate withdrawal. This means these accounts can be quickly converted into cash without losing value.

Money market accounts are nonterm deposits, so there is no maturity date. You don't lose any interest when you liquidate your account. Term deposits such as certificates of deposit (CDs), on the other hand, require that you keep the account open until the maturity date. If you make any early withdrawals in this case, you could lose your interest.

However, there are two factors that could reduce the liquidity of a money market account: minimum balance requirements and withdrawal limits. Unlike checking or savings accounts, money market accounts may require a high minimum balance—sometimes $5,000 to $10,000 or more.

Minimum Balance Requirements and Withdrawal Limits

Commercial banks and credit unions provide money market accounts to attract relatively large, stable deposits in exchange for interest rates that are slightly higher than those for the average savings accounts and interest-bearing checking accounts. This stable deposit base increases the financial institution's ability to make loans.

As a result, banks may impose some terms that affect liquidity, like minimum balance requirements and limitations on the number of withdrawals. If you violate these balance requirements and transaction limits, you could lose interest earned on the deposits or face fees.

Money Market Accounts vs. Money Market Funds

Money market accounts, which are federally insured deposit accounts, are different from money market funds offered by investment banks.

Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which provides a regulatory and structural support for these accounts. Those that you buy from a credit union are insured by the National Credit Union Association. (Of course, in the event of a bank failure, it could take some time to recover any affected funds, which may reduce liquidity.) However, this federal insurance is an important, and often misunderstood, distinction between money market accounts and money market funds.

Money market funds are a type of mutual fund. They are somewhat similar to a money market account in that they are low-risk assets that also invest in short-term, highly liquid vehicles. But they have many differences.

Money market funds are offered by investment firms, which sell shares to investors in the fund. Investors can sell their shares if they need cash, which generally incurs capital gains or losses that must be reported to the Internal Revenue Service (IRS).

And unlike money market accounts, the principal in a money market fund is not guaranteed. Money market funds are regulated by the Securities and Exchange Commission (SEC) and aren't insured by the FDIC.

Bottom Line

Money market accounts are considered highly liquid, offering liquidity that is similar to savings accounts. Aside from checking accounts, money market accounts are one of the most liquid places to keep your money. Keep in mind that when your money is in a money market account, it does not have as much potential for significant returns as you might find with other assets like stocks and bonds. It's main advantages are liquidity and security.

Consider consulting a financial advisor who can guide you through making investment decisions based on your personal goals and financial situation.