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The Differences Between Money Market Accounts and Money Market Funds

Money market accounts and money market funds are two different types of accounts that serve a similar purpose.

Despite that, and their very similar names, there are significant differences between the two.

Learn how each of them works and when they are most appropriate for your finances.

Money Market Accounts

Money market accounts are a type of bank account, much like a savings account, that is designed to offer interest on large balances of cash.

Savings with checking features

What separates a money market account from a savings account is that they have some of the features of a checking account as well.

This gives people with money market accounts more flexibility to access their cash.

Like a savings account, money market accounts pay interest. Often, these accounts pay as much interest or more than savings accounts do.

This is offset by the fact that money market accounts often charge higher fees than savings accounts.

Higher balance requirements

Another thing to consider is that money market accounts often have higher balance requirements.

Many banks will let you open a savings account with a deposit of less than $100.

It’s not unusual to see money market accounts that requiring an opening deposit of $1,000. Sometimes, you’ll need to maintain a balance higher than that to avoid monthly fees.

Because of the significant balance requirements, money market accounts are usually good for money you don’t often need access to.

Putting your emergency fund in a money market account is a good way to maintain a balance high enough to avoid fees.

Like a checking account, you can get a debit card that you can use to access your money market account. You can also get a checkbook and write checks against the account. That makes it easy to access and spend the money in the account.

Withdrawal rules (and fees) may apply

One thing to watch out for with a money market account is the excess transaction rules.

You are limited to six debit or check transactions in the account per statement. If you make more than six such transactions in a statement period, you’ll have to pay a fee.

That fee varies from bank to bank but is usually in the range of $25. The fee is charged for each transaction past the sixth, so it can get expensive very quickly.

Money is insured

It is important to know about money market accounts is that they are insured by the Federal Deposit Insurance Corporation (FDIC).

The FDIC was founded in the wake of the Great Depression to help restore confidence in the banking system.

It does that by guaranteeing that you’ll get the money you deposit in an insured account back, even if the bank ends up shutting down.

Money market accounts are insured up to $250,000.

Money Market Funds

Unlike money market accounts, which are offered by banks and credit unions, money market funds are generally offered by brokerages and investment firms.

Low-risk investment fund

Money market funds are a type of mutual fund that takes investors’ money and invests it in safe, short-term securities.

These tend to be certificates of deposit, government bonds, and other incredibly low-risk investments.

What this means is that the money you put in a money market fund is generally safe, but it is not insured.

It is possible for a money market fund to lose value, but it is exceedingly rare.

Fact: One of the times it ever happened was in the wake of the 2008 financial crisis, when the Reserve Primary Fund dropped 3% of its value. This was such a shock to the financial system that the government actually stepped in and offered a guarantee on money market funds, ensuring that no investors in any other money market fund lost money.

When a money market fund loses value, it’s known as “breaking the buck.” The reason for this is that money market funds target a share value of $1.

To maintain that value, they pay out all earnings to investors in the form of cash or additional shares of the money market fund.

Rules on fund portfolio

Part of the reason that it is so uncommon for a money market fund to break the buck is that there are strict rules regarding what they can invest in.

In general:

  • No bonds in the portfolio can have a maturity date that is more than 13 months from the current date and the average maturity of the portfolio is 90 days or shorter.
  • The bonds held by the money market fund must be AAA quality, the highest rating possible.
  • The money market may hold no more than 5% of its assets in bonds from the same issuer, other than the US government.

Because breaking the buck is so rare, allowing it to happen would be a catastrophic blow to a firm’s reputation.

No company will take risks to try to increase returns by a small amount when failure could result in such a blow.

Extremely liquid 

Money market funds, like money market accounts, are very liquid.

You can withdraw money from it almost as if it were a bank account.

Some investment firms even let you use it like a checking account, offering check-writing capabilities.

Brokerages use money market funds as a sort of holding account for money that you want to invest.

If you have cash in a money market fund, you can immediately use it to purchase stocks, bonds, mutual funds, or other investments. If you have money in the bank, it can take days for the transfer to go through.

Similarly, when you sell an investment, most brokerages will sweep the proceeds into your money market fund by default.

No FDIC insurance

Because money market funds are allowed to invest their money in things like bonds, they can offer more interest than money market accounts.

Of course, this is offset by the lack of FDIC insurance.

Though it is unlikely, there is no guarantee that your investment won’t lose money.

Money market funds also offer less return than investments such as stocks, because of their low risk.

Which is Better?

There’s no real answer to whether a money market account or money market fund is better.

They are simply different accounts and serve different purposes.

  • Money market accounts are best-suited for savings where you might need immediate access to cash.
  • Money market funds are best for longer-term cash holdings or for cash that you might want to invest at short-notice.

Money market account for easily-accessible savings

A money market account is great for something like an emergency fund.

The money in the account isn’t needed immediately, but might be needed on short notice. Because you aren’t using the account regularly, you don’t have to worry about the excess transaction fees.

The liquidity of the account, thanks to the check-writing ability, makes it easy to use in a pinch.

Hopefully, your emergency fund is large enough to also avoid minimum balance fees.

As a bonus, the high interest rate also lets you earn a good return on your emergency fund.

Money market funds for idle investing money

If you ever want to invest in stocks or mutual funds, you’ll probably be required to open a money market fund.

Most brokerages use their money market fund as a settlement account.

Money used to purchase investments is pulled from the account and money earned from selling investments is deposited to the account. You can also request that dividends paid by your investments be deposited to your money market fund rather than be reinvested.

Generally speaking, you would not want to keep too much money in a money market fund.

They offer relatively low returns and don’t have the benefit of FDIC insurance.

Instead, you’d likely want to invest the money that would be in your money market fund in stocks, bonds, or mutual funds.

Remember that the stock market has averaged annual returns of nearly 10% since the early 1900s.

Letting your money sit uninvested in a money market fund can be a huge opportunity cost.

The exception to this rule is if you need your portfolio to be extremely low-risk.

For example, if you have money in a retirement account such as IRA and are near retirement, you might want to transfer some of the funds to a money market fund.

This avoids the hassle of rolling a portion of the IRA to a savings account.

It also lets you keep the money liquid so you can access it quickly when you need it.

Conclusion

Money market accounts and money market funds are very different types of accounts.

It can be difficult to tell them apart due to their similar names. Knowing the difference between the two is important.

One of the most important differences is that money market accounts are insured by the FDIC.

Remember the differences and do your best to choose the right type of account for your goals.

If you do, reaching your goals will be just that little bit easier.