Money market accounts are a type of deposit account that offers flexible access to your funds, coupled with a higher interest rate than what you might get with a traditional checking or savings account.

A money market account can help you work toward and achieve your short-term savings goals, but how does a money market account work? Before you open one, it's crucial to understand how they work and their limitations.

Types of money market accounts

As with savings accounts, there are two types of money market accounts: traditional and high-yield accounts. Traditional money market accounts offer relatively low interest rates, albeit better than most traditional savings accounts on average.

In contrast, high-yield money market accounts offer interest rates that are much higher than traditional money market accounts. That said, they may or may not offer higher rates compared to some high-yield savings accounts.

How money market accounts work

As you compare your savings options, here's a breakdown of how money market savings accounts work:

• Access to funds: Like a checking account, you can typically access your money using a debit card, paper checks, an ATM card, or via bank transfer. That said, you may be limited to six withdrawals per month, which is a feature shared with savings accounts. After that, your bank or credit union may charge an excessive withdrawal fee or even decline your requests.

• Interest: You can expect to earn interest on your balance, typically at a higher rate than traditional checking and savings accounts. That said, interest rates can vary depending on the financial institution and the type of money market account you choose. Also, some financial institutions may offer tiered rates based on your balance.

• Monthly fees: Like checking accounts, some money market accounts charge monthly fees, though you may be able to get yours waived if you meet certain criteria.

• Insurance: Like other deposit accounts, the funds in your money market account are typically federally insured, either through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

• Balance requirements: Balance requirements can vary, but in some cases, you may need to meet a certain minimum requirement to avoid a monthly fee or even to earn interest.

Money market account pros

There are a few benefits to using a money market account to stash your savings over other options:

• Higher interest rates compared to savings accounts: In most cases, money market accounts offer higher interest rates than traditional savings accounts. However, some high-yield savings accounts can be competitive with high-yield money market accounts.

• Lower risk compared to other investment options: If you're saving for short-term goals or emergency needs and don't want to risk losing money, a money market account can be a great alternative to investing the money.

• Easy access to funds: While there may be limits on how often you can withdraw, you'll still have easier access to your funds than with a savings account.

Money market account cons

While there are some clear benefits to using a money market account for your savings, it's also important to consider the potential drawbacks:

• Limited withdrawals: If you plan to use your money market account for everyday banking, think again. While the federal government no longer limits monthly withdrawals to six on money market and savings accounts, many banks and credit unions have retained the limit and may charge you a fee for excessive withdrawals.

• Lower potential returns compared to riskier investments: If you're looking for a place to put your money for long-term financial goals, you'll have a better chance of earning a higher return with an investment account.

• Fees and charges can eat into returns: If your money market account charges a monthly fee, it'll diminish or even neutralize your interest earnings.

Choosing a money market account

If you're considering a money market account, it's important to research and compare multiple options before settling on one. As you shop around, here are some factors to consider:

• Interest rates, including stipulations like balance requirements or tiers

• Monthly fees and excessive withdrawal fees

• Minimum deposit requirements to open an account

• Options for funds access

For the most part, online banks offer the best money market account interest rates, but some traditional banks and credit unions also offer them.

Managing a money market account

Here are some steps you can take to make the most of your money market account and your short-term savings goals:

• Track your account activity: Keep track of your deposits and balance, particularly if you use the account to work toward a specific financial goal. Also, track your withdrawals to ensure you don't exceed your account's monthly limit.

• Evaluate and adjust your saving strategies: Regularly assess your approach to your short-term savings goals and adjust as needed. For example, if you've recently incurred some emergency expenses, it may make sense to focus on replenishing your emergency fund over other goals, such as a vacation or home down payment.

• Plan for long-term savings goals: While a money market account can be a good spot for short-term savings needs, you'll be better off with an investment account for long-term financial goals like retirement, education planning, and more. While investing is riskier, it'll also increase your potential for higher returns over time.