Forget Checking Accounts: Money Market Accounts Pay Higher Interest

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Banking products are always evolving to offer new and useful combinations to consumers. There used to be a time when you used a checking account only for handling checks.

These days hardly anyone writes checks. Instead, top checking accounts have become a one-stop-shop for a host of everyday transactions.

Some high-yield checking accounts even pay interest. However, if you want to earn interest on a transactional account, it is worth looking into money market accounts (MMAs) . Think of them as hybrids between savings and checking -- you get decent interest payments, but without as many restrictions on how you can access your money as you'd get with savings accounts.

If you're tired of earning low APYs on the money in your checking account, MMAs can be part of the answer.

What is a money market account?

Money market accounts are a type of deposit bank account. They pay high APYs and often come with debit cards or check-writing privileges, so you can access your funds easily.

The best APYs on top MMAs right now are as high as 5.30%. In comparison, top checking accounts might pay around 1.00%, maybe more.

There are a lot of different MMAs out there. Some will demand a high minimum balance for the more competitive APYs, while others limit the number of transactions you can make.

The transaction limit is a hangover from a Fed rule called Regulation D. The rule was suspended during the pandemic, but some banks still implement it.

It's worth shopping around. Some MMAs are paying APYs of over 5.00% right now. You will find that some allow unlimited deposits and withdrawals, and many have no (or very low) minimum deposit requirements. Check to make sure there are no monthly fees.

Don't confuse MMAs with money market funds, which are a type of investment and do not come with FDIC protection. The majority of MMAs are offered by FDIC-insured banks and will give the same protection as your savings or checking account.

Money market accounts vs. checking accounts

Put simply, checking accounts offer a lot more functionality than an MMA. Debit cards, automatic transfers, a wide network of fee-free ATMs, online banking, mobile banking apps, and more are standard with a checking account.

You won't get this level of functionality with an MMA, though you'll usually get higher rates of interest. Money market accounts offer more functionality than a lot of savings accounts , but not as much as a checking account.

Here are some key differences and similarities between the two:

Money market account

• Often pay higher APYs than both checking and savings accounts
• May have higher minimum balance requirements
• May allow check writing and/or debit card
• FDIC insured

Checking account

• Usually pay low APYs or no interest at all
• Usually have low or no minimum deposit requirements
• Range of transaction options
• FDIC insured

There's a rule of thumb that suggests we keep one to two months' worth of expenses in our checking accounts. But if you want to maximize your interest earnings, it's worth thinking about whether your MMA and checking accounts could work together.

For example, you might be able to keep a slightly lower balance in your checking account and move money from your MMA as necessary. Or consider what transactions you can carry out from your MMA without using your checking at all.

That level of active management takes effort and you'll need to make sure you don't accidentally overdraw your checking. But it could be worth it. To give you an idea, a balance of $5,000 in an MMA that earns a 5.00% APY could earn over $250 in interest a year.

Key takeaway

I'm a big fan of maximizing interest on every single dollar. But sadly, you probably can't forget checking accounts completely. They may pay low interest rates, but they are also financial workhorses and useful for a lot of your daily transactions.

All the same, as we enter a phase of lower savings rates, there's no harm in getting creative to earn a slightly higher APY. As such, it could be good to open a money market account and use it to complement your checking.

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