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A money market account you buy from a bank is different from a money market mutual fund you buy from a broker. Make sure you know the difference!
A money market account is similar to an interest-bearing checking account, and is a product you buy from a financial institution. It's a product insured by the Federal Deposit Insurance Corporation (FDIC), and is a good option for maintaining your emergency fund. A money market account generally pays better interest rates than a typical checking or savings account, and gives you the flexibility of easy access, along with the higher rates of return of an investment product. The interest paid on a money market account tends to follow short-term market interest rates and varies as the market changes. Money market accounts may require a large initial deposit to open the account. They may also require a minimum balance, and you may have to pay a fee if your balance falls below the minimum required.
Don't confuse a bank-issued money market account with a money market mutual fund, which is not FDIC insured. In comparison, while the yield may be higher with a money market mutual fund, this product is an investment product and comes along with some of the risks associated with investing in the stock market. For help in distinguishing the differences in these financial products, see the Federal Reserve Bank of San Francisco's publication Bank Products - What's Insured and What's Not and the FDIC article Insured or Not Insured?
Take a look at some of the features and benefits of a typical money market account. Be sure to check with your financial institution for a complete product listing of money market accounts offered.
|Bank-Issued Money Market Accounts|
|Very Liquid (readily available to convert to cash)||You can usually write up to three checks per month and make unlimited ATM withdrawals.|
|Personalized Checks||Looks like a regular checking account check to depositors, merchants, etc.|
|FDIC Insured||Federally insured up to $100,000.00 per depositor.|
|Combined Statements||Money market accounts can usually be combined on your other accounts' statements to show all of your accounts (checking, savings, etc.) on one, easy to read, monthly statement.|
|Unlimited Access||Typically allows you to access your account 24 hours-per-day via your institution's network of ATMs, telephone banking, and Internet banking services.|
|Reasonable Rate of Return||Rates of return are higher than typical checking or savings accounts, but lower than Certificates of Deposits, money market mutual funds or other investment products.|
Money market mutual funds are low-risk mutual funds that are simple to invest in. Just like other mutual funds, this type of fund is operated by investment companies, not banks, and is made up of many shareholders who buy individual shares. Since these are not bank products, they are not FDIC insured; however, they are considered a relatively safe investment because they invest in short-term government and corporate debt obligations, like Treasury Bills. A money fund, as it is typically called, does not invest in stocks or bonds so the return is fairly constant and the risk is fairly low. Money market mutual funds generally pay a higher rate of return than a bank-issued money market account, but lower than you might receive in a securities-invested mutual fund. Since a money fund is a mutual fund, it carries management fees, although the fees tend to run lower than other mutual fund fees. You can easily withdraw funds from a money market mutual fund without penalty. For more information on mutual funds, search the CareOneCredit Knowledge Center Articles.
Either of these types of accounts is a good choice for maintaining an emergency fund. Although your money is very liquid in either type of account, with a money market account you may be able to access your funds from your bank's ATM. There may be penalties on either account for excessive checks or withdrawals. The money market mutual fund may pay a slightly higher rate of interest; however, the management fee may be slightly higher than the fees associated with a bank-issued money market account. Both of these types of accounts may require a higher minimum balance than other savings options. You'll have to check with your financial institution to determine minimum balance requirements to make a comparison to a money fund. Finally, although bank-issued money market accounts are federally insured by the FDIC, money market mutual funds are also considered a very safe place to keep your money. When evaluating a money market account or a money market mutual fund, compare the annual percentage yield (APY) to determine which product will generate a higher return. Weigh the ease with which you can access your funds when you need them and, lastly, consider your risk tolerance and whether you want your funds guaranteed by the federal government.
While the question may seem elementary, the answer can be quite complex. Understanding what banking is all about will help you make better financial decisions.
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