Is a money market account right for you?

If you are like most responsible adults, you have a savings account. You may use it to park your emergency fund or sock away money for a fantasy island vacation. Whatever you plan to use it for, you may want to reconsider whether your money is in the right place. Even the best savings account can't always match money market rates.

Still, a money market account isn't for everyone. While some may benefit from the increased interest rates these accounts carry, for others, there are red flags that shouldn't be ignored. We'll tell you who should open a money market account and who should stay far, far away. But first, a little background…

What is a money market account?

For practical purposes, a money market account is essentially a savings account that comes with certain restrictions. Although they are not as liquid as regular savings accounts, money market accounts have their benefits. They can be a smart choice for individuals who want to earn a little extra interest while still having access to their money.

To open a money market account, you need to make an initial minimum deposit that may run anywhere from $500 to several thousand dollars depending on the financial institution. Unlike a certificate of deposit (CD), which may penalize you for tapping into your money, a money market account allows a maximum of six transfers from the account each month. In addition to accessing your funds through electronic and telephone transfers, most institutions allow you to write up to three checks per month from the account as part of your six transfers.

Be aware there is a difference between a money market account and a money market fund. An account is generally offered by a bank, and money deposited in the account is insured by the FDIC. Money market funds are offered by brokerage firms and do not have this same insurance coverage.

Open a money market account if…

• You are looking to earn extra interest on your emergency fund. If you have successfully saved three to six months of living expenses for an emergency fund, it may be tempting to put the money in a CD or investment account where it will earn more interest. However, CDs tie up your money, and investments can be risky and difficult to access. Since you never know when an emergency will arise, a money market account can give you extra interest while allowing you access to your cash at a moment's notice.
• You plan to use some of your cash in the near future. Like an emergency fund, savings for a short-term goal can also benefit from being deposited in a money market account. Placing your home remodeling fund, for example, in a money market account will likely give you an extra boost of interest while allowing you to make withdrawals as needed.
• You like the security of FDIC-secured banking products. If you are risk averse, a money market account or CD may be your best bet. You earn more interest with these products, and bank deposits of up to $250,000 are insured by the FDIC. You may think CDs will give you a greater return, but money market rates can be very competitive. Compare CD rates closely before making your selection.

Think twice about opening a money market account if…

• You can't keep a balance in your savings account. If you find yourself draining your savings account every month, a money market account is not for you. Most accounts have minimum balance requirements. You could be penalized or have your account closed if you fall below that amount. Money market accounts are best for those on stable financial ground, so wait until you are past living paycheck to paycheck before opening one.
• Your money is for retirement or a long-term goal. If your nest egg if for retirement or a college fund for an infant, you'll be better off placing the money in an investment account. Despite the recent turmoil in the stock market, investments have historically performed well over long periods of time. Look into Roth IRAs for retirement funds and 529 accounts for college savings.
• You are happy with your online savings account. Some of the best online savings accounts offer competitive interest rates that can be nearly as much as money market rates. If you are earning more than 1 percent interest from your online savings or checking account, it may not be worth your time to hassle with opening a new account and transferring your money. However, rates change all the time so be sure to get the latest interest information before making a decision.

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