To kick off the New Year, I decided to focus on growing my savings by setting up automated payments into my money market account. Recently, I had mentioned this in passing, which resulted in a conversation around money market accounts. What seems as a simple conversation became confusing and by the end I had realized we were mixing up Money Market Accounts and Money Market Funds.
Also known as MMA, Money Market Accounts are the most commonly seen savings accounts advertised by banks. In reality, they mirror standard savings accounts very closely. When comparing money market accounts to money market funds, also known as money market mutual funds, the biggest differences are can be categorized in risk and choice.
This level of risk can be the main factor in your final choice when protecting your hard earned cash.
Money Market Accounts
Money Market Accounts are considered the bank alternatives to money market funds. These accounts often pay a nice annual percentage yield (APY), while keeping your money safe within an FDIC insured bank.
The interest rate paid out is usually on par or maybe a little higher than a savings account. Thus, the main reason for choosing a money market account versus a regular savings is to obtain the ability to perform limited check writing or debit card payments. Because of the ability to write checks, money market accounts are seen almost as a cross between a savings and checking account.
As with savings, money market accounts carry additional restrictions, such as; a higher minimum balance and a number of limited transactions. But in some cases you will see tiered rate money market accounts, which can carry superior rates.
Find and Compare: Money Market Accounts
What is a Money Market Fund?
When we compare, a money market fund aka money market mutual fund, or money fund, we find it carries no FDIC insurance and is simply a collection of short-term debt investments held by that mutual fund. The fund is less about deposits and more on investments. It is something you buy and sell shares of, not something you deposit and withdraw from.
The funds you invest are placed into debt securities that mature in less than 13 months. To keep the risk down the SEC requires the average maturity of investments in a money market fund must be less than 90 days.
In my introduction I mentioned how risk and choice go hand in hand when making the decision which account to open. This choice is not only applied to whether you should go with an MMA or MMF, but also which money market fund you are willing to invest into or the type of debt you purchase. Let’s take a look at the types of options that are available:
- US Treasury backed money market funds
- US government and agency backed money market funds
- Municipal money market funds
- Local municipal money market funds
- Socially responsible money market funds
Typical investments inside a money market fund are US Treasury issues, US government and agency bank, and CDs. These options bring both a level of risk and choice. As investor, you can choose the money market instruments used in the fund. Some people are only comfortable with securities backed by the US government. Likewise, some people use municipal money market funds in order to earn tax-free income.
If you are considering money market funds, it is important to know that rates are variable and are typically quoted on a seven-day average yield vs the annual yield you see with a banking account. And unlike shares in a stock market the value of each share in a money market fund is always valued at $1. It is the interest rate that fluctuates and therefore depending on how the market reacts, you may see higher returns one month and lower or the same as a money market account the next.
Choosing the Money Market that fits your needs
Which one is right for you? The answer depends on the level of risk you are willing to take on. For investors who prefer safer approach,a money market accounts is the option for you. Again, unlike money market funds, the FDIC insures money market accounts no matter what happens to the bank (for banks that are FDIC insured). This reason alone is why you will receive a lower rate of return – less risk.
If you are willing to take on more risk believe money market funds are the direction for you, you should ensure your investment is on the large. Investing a $1,000 with a 3 percent on the return will barely cover the $25 annual fee and half percent in annual expense you will pay to participate.
For those who do not need access to their money on a regular basis, opportunities to earn some additional cash with no risk are still available through certificate of deposit (CD).