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Money Market Account
The money market is a market in fixed-income securities. Like other fixed-income securities markets (the bond market, for example), the money market is a stable place to put your money but it's not a get-rich-quick plan. We'll walk you through what it is and how it works. If you decide it's for you, it's a good idea to shop around to find the best money market account (MMA).
How the Money Market Works
Like bonds, money market securities are fixed-income securities that act as IOUs. The purchaser earns a modest amount of interest and the seller promises to return the principal (purchase price) of the money market security at a later date.
Money market securities are very liquid and they have short maturities. Examples include short-term certificates of deposit (CDs), US Treasury bills (T-bills), repurchase agreements (also known as "repos") and commercial paper (short-term unsecured loans issued by companies that need to raise money).
What Is a Money Market Account?
Money market accounts come from banks, credit unions and other financial institutions. They're similar to savings accounts, but usually have a slightly higher rate of return. They also generally have limited check-writing, withdrawal and transfer allowances.
When you open a money market account, you're not actually buying the money market securities we described above. The bank or other financial institution owns and trades those securities, so you don't need to worry about which money market securities to invest in.
Like money in a savings account, deposits of up to $250,000 in a money market account are insured by the FDIC or the National Credit Union Administration. The catch, though, is that money market accounts may come with fees to offset their greater rate of return. If you maintain a high balance you can avoid these fees, but if you don't you may pay higher fees with a money market account than you would with a savings account.
Money Market Account Rates
Generally, the best money market account rates are available to customers who are willing and able to make large deposits. However, because money market account rates tend to be low, there isn't as much variation as you might think. Both local and national banks offer money market accounts. You may find a better rate from one kind of bank, but more perks from another.
When you're shopping for a money market account, it's important to not just look at the stated rate - but to read the fine print. Some money market accounts come with introductory rates that drop after a certain period.
You likely don't want to put your hard-earned money into an account that you think has a competitive rate, only to find that you're earning less down the road. It's important to also look for the "ongoing rate," the rate you'll get after any introductory deals expire.
It's also a good idea to keep an eye on minimum deposit requirements and monthly balance requirements when you're shopping for a money market account. Failing to meet either kind of requirement can mean you incur fees that eat into your savings.
When Money Market Accounts Make Sense
Because they're a safe place to stash your money, money market accounts can work well as a home for some emergency savings. Money market accounts pay fairly low interest rates these days, but their rates may still be higher than the interest rate you would get on a savings account at a bank.
Compared to a savings account, a money market account can offer a higher rate of growth - though not as high as what you could get from investing in stocks. Money market accounts generally have the same advantages and disadvantages as savings accounts. The advantage is the safety of the investment. The disadvantage is the lower rate of return.
A low rate of return is significant not just because it means less growth, but because it means more vulnerability to inflation. If the rate of return on your money is lower than the inflation rate you're actually losing money by keeping yours in a money market account.
You may be willing to pay that price for the money you keep in your emergency fund, but you probably don't want to put all your money in such a low-growth account unless, perhaps, you're very close to needing that money for retirement.
What About a Money Market Mutual Fund?
A money market fund is a mutual fund that holds low-risk money market securities as the account asset. They're required by law to hold low-risk securities, but they can still lose money. Money market funds are often the default destination for investment accounts.
Say you write a check to your 401(k) provider or the brokerage that houses your tax investments. That money will often be parked in a money market fund until you make the time to sit down and put it into, say, a mix of stocks and bonds.
Putting all your savings in a money market fund and leaving them there typically isn't a good asset allocation strategy if you want that money to grow over time and fund your retirement.
Some unlucky savers have made 401(k) contributions for 20+ years, only to discover that, because their contributions all went to a money market fund, their savings have hardly grown. Plus, money market funds (unlike money market accounts) can actually lose money during a market downturn.
You can open a money market account quickly and easily online through a bank. You can write checks from a money market account (another advantage they have over savings accounts) and in some cases you can get a debit card tied to your money market account. That's why many customers choose money market accounts for savings they may need to access on short notice.