Money Market Account

What is a money market account?

Money market investing is a big piece of the puzzle that puts together your whole investing portfolio. A money market is like a savings account with higher interest rates - usually significantly higher. The differences between a normal savings account and a money market are:

• You usually have a minimum balance requirement. $1,000 is a common account minimum. If you want to put less than $1,000 into it, don't worry. You can get one with a $1 minimum, but its interest rate may not be as high.
• Some allow you to write checks directly from the account. I don't use this feature because I already have a checking account and don't want more than one checkbook floating around for me to find. If I need the money in my checking, I just transfer it over and becomes available within a few days.
• They typically only allow about 3-5 withdrawals per month. I've never needed more than 2.

Like a normal savings account, they are FDIC insured.

Why would you want a money market?

• Every investor should have a significant chunk of cash stowed away.
• It gives you a cushion that you can transfer to your checking account within a few days.
• Cash helps keep your emotions stable during downswings in your investments.
• Its the highest earning way to get safe, FDIC insured cash. The interest rates on money markets are normally far higher than regular savings account rates
• money market funds aren't FDIC insured.

What's the drawback to putting money in a money market? Over long periods of time, it will underperform most other asset classes - like stocks and bonds. You may not even beat inflation. If you don't beat inflation, then your buying power has actually decreased - even if your money market has more money in it.

How do you get and use one?

The first step is to look for the best interest rate in a bank that you can feel safe with. Be aware that rates are not consistent and the banks that offer the top rates now likely won't in the near future. So you shouldn't "rate chase" too much.

Are money market funds and accounts the same?

No. They're both considered cash. However, money market funds aren't FDIC insured. Except, as of September 19, 2008, many of them are temporaly FDIC insured. A money market account also works more like a bank savings account and a money market fund works more like an investment account.

Which type of money market is better?

My personal preference is for the account because, first and foremost, its FDIC insured. I can also get a higher rate with a money market account. On top of that I find money market accounts to be very easy deal with. Those three things together make it seem like a no-brainer to me.

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