When Is the Best Time to Open a Money Market Account?

What Is a Money Market Account?

Money market accounts allow you to earn interest on your money and easily make withdrawals as needed. It's almost like a checking account and savings account rolled into one. Most come with a checkbook or debit card that can be used to pay bills or make purchases online or in person. However, some financial institutions may limit the number of free electronic transfers and withdrawals you can make per month.

Given their higher-than-average interest rates, money market accounts can be a good place to park your emergency fund or save for financial goals. As of November 2023, some have yields over 5%. The average rate on a traditional savings account in November 2023 is 0.46%, according to the Federal Deposit Insurance Corp. (FDIC). You could land an even better rate with a certificate of deposit (CD), but these accounts often come with early withdrawal penalties.

Money market accounts are considered low-risk investments. They're FDIC-insured for up to $250,000 per depositor, per insured bank and ownership category. Similar coverage is available through credit unions.

How Are Interest Rates on Money Market Accounts Determined?

Interest rates are tied to the federal funds rate, which is set by the Federal Reserve. Banks use that to determine the rates they charge on loans and the yields they offer on certain deposit accounts. Interest rates on money market accounts, savings accounts and CDs tend to move in the same direction as the federal funds rate. When it increases, annual percentage yields (APYs) on these accounts usually do the same (and vice versa).

When Should You Open a Money Market Account?

Timing matters when opening a money market account. Here are some important factors to consider:

• Current interest rates: Account yields are constantly in flux. During the pandemic, for example, the federal funds rate was below 1%. In November 2023, it was over 5%. If rates are on the decline, you can expect lower APYs on money market accounts but potentially better stock market performance. The opposite also tends to be true.
• Promotional offers: Some banks and credit unions may offer higher rates to new members or bump up rates as part of a promotional offer. Be sure to compare financial institutions and consider potential account fees and minimum balance requirements.
• Your investment portfolio: Diversification is important when investing. Holding a mix of different assets can help mitigate risk and prevent you from keeping all your eggs in one basket. A money market account could make sense if you're looking to add safer, liquid investments to your portfolio.
• Your savings goals: If you have short-term financial goals on the horizon, a money market account can be a good option. You'll earn interest, plus your money will be insured and safe from stock market volatility—and you can easily withdraw funds when you're ready.

How to Open a Money Market Account

1. Compare different money market accounts. Before you open a money market account, shop around to see which financial institutions have the best rates. Also consider fees, minimum balance requirements, ATM access and any stipulations in the fine print.
2. Complete an application. Be prepared to provide basic personal information like your address and Social Security number. There may also be a small fee if you're joining a credit union. A credit check isn't required, but the financial institution might pull your ChexSystems report. This shows your banking history and past account activity.
3. Fund your account. You may need to make a minimum opening deposit to get started. If you plan to use your money market account to hold your emergency fund, you can transfer those funds and start earning interest. You can also link your money market account to your checking account and set up automatic transfers to build your savings.

The Bottom Line

Only you can decide if it's the best time to open a money market account. Current interest rates play a big role, as do your savings goals. Your investment portfolio is important too, especially when considering your asset allocation. Be sure to compare money market accounts at different financial institutions before making a decision.

A money market account can allow your savings to earn interest and grow faster. Saving is an important part of financial wellness, and so is your credit health. Free credit monitoring with Experian is a simple way to keep up with what's on your credit report and identify potential fraud.