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 a deposit account offered by banks. It’s like a savings account, only with higher interest rates -- usually significantly higher. The banks invest the funds in government and corporate securities. The differences between a normal savings account and a money market account 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. You may also have to pay a monthly maintenance fee if your balance is below a certain amount. Be sure to ask about this.
• 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 more money in my checking, I just transfer it over and it becomes available within a few days.
• They typically only allow about 3-5 withdrawals per month. I've never needed more than two. Remember, you’re not using this for frequent access – the goal is to use it for emergency funds or unexpected needs. The goal is to be regularly transferring money into this account, not out of it.
• Like a normal savings account, they are FDIC insured.

Why would you want a money market account?

• Every investor should have a significant chunk of cash stowed away. Rainy days are easier to handle when you have liquid cash that’s readily available right when you need it.
• It gives you a cushion that you can transfer to your checking account within a few days. Easy access is the hallmark of a money market account – you don’t have to wait to sell your investment, wait for the funds to clear, etc. Your money is liquid and can be transferred to your checking account in a few days (usually two business days).
• Cash helps keep your emotions stable during downswings in your investments. It’s amazing how much better you’ll feel when you can look at your money market account balance and know that you can handle an emergency or unexpected need.
• It’s 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 (while money market accounts are).

What's the drawback to putting money in a money market account?

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 account has more money in it.

How do you get and use one?

The first step is to look for the best interest rate offered by 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. It’s wise to find a reputable bank with a solid reputation that offers a good rate.

Are money market funds and money market 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 temporarily 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.

Money market accounts maintain their value so that $1 remains $1 (this is not taking inflation into account). So if you put $1000 in a money market account, six months later, you’ll still have $1000 (plus any interest you’ve earned). On the other hand, with money market funds, while they strive to maintain $1 at $1 in value, it is not guaranteed. Just like other investment accounts, they can fluctuate. While it is highly unlikely to see them lose value, it is a possibility.

Tell me more about money market funds.

While money market funds are not FDIC insured, the SEC keeps a close eye on them. Typically, money market funds invest in financially stable securities which have very short maturity dates (an average of 120 days or less). This means that money market funds are buying a lot of government issues (municipal, state and/or federal). They do this because of the relative safety of these investments. And although money market funds will have a lower return than broad stock or bond funds, they will offer a higher return than your savings account.

Which type of money market is better?

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

What reputable firm offers money market accounts or funds with good returns?

For a money market account, an excellent choice is Ally Bank. They are an online bank that is based in Utah, and have been offering among the highest interest rates in the market. They call their account a savings account, but it has all the features and benefits of a money market account. Just to give you an example, a recent Money magazine listing showed that the average money market/savings account in the US was paying 0.15% in interest, while Ally Bank was paying 1.00%! Another nice benefit of Ally Bank is that they offer customer service 24/7, with a human being on the other end of the phone. When you’re working on your personal banking late at night, this is a huge benefit.

For a money market fund, my favorite is Vanguard Investments. They are a solid, reputable firm with excellent customer service both via phone and online, and they are known for having the lowest fees in the industry. In fact, they coined the term “no load mutual fund.” If you want to sleep well at night and be treated with the utmost respect and professionalism, they are the clear choice.

Note: I don’t receive any remuneration from Ally or Vanguard. I’m simply recommending them because they do a great job.

To summarize, a money market account is an integral piece in your investment puzzle. It offers you a place to store and amass cash, with the highest liquidity (availability) and a much higher return than a typical savings account. By building up your liquid cash reserves in a money market account, you will be able to sleep like a baby no matter what is happening with your investments in the short-term -- and that alone is well worth it!

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