Money market accounts might be a good investment choice if you’re risk-averse and value liquidity. You can choose between money market accounts at your bank and mutual funds. While money market accounts are FDIC-insured, mutual funds are not.
But each benefits investors and individuals who want to gain stable earnings. For example, money market accounts also let you access your funds without the restrictions that come with a certificate of deposit (CD).
While CDs might earn you more interest, you lock away your money for a designated period. Money market accounts and funds, on the other hand, back you in an emergency. This article will review what money markets are and their benefits to consumers.
Money Market accounts
Money market accounts may be available through a local bank or credit union. They work similar to savings accounts, except you sometimes get a set of checks and a debit card. You might face certain withdrawal limits, though.
For example, you might be able to write two checks a month against your balance. You could be subject to the same withdrawal limits with your debit card. Some money market account withdrawal limits are set by dollar amounts instead of the number of times you can take money out.
You’ll typically score a higher interest rate than you would with a traditional savings account. However, you might face higher minimum and daily average balances. At the same time, the FDIC insures your deposits of up to $250,000.
Advantages of Money Market accounts
Here’s a rundown of the main advantages of money market accounts:
- Higher interest earnings than most savings or interest-bearing checking accounts.
- Lower risk of losing large investment amounts.
- Ready access to funds in case of emergencies or immediate cash needs.
- Can link with other accounts at the same bank for automatic deposits and transfers.
With some of these advantages comes the flip side. When you have easy access to your funds, you might be more tempted to spend them. With CDs, you can’t touch your money while it grows for one year, five years, or ten years.
It takes a higher level of discipline to save with more liquid accounts. You also have to shop for the best interest rates and may find that some high-yield savings accounts pay more.
Money Market Funds or Mutual Funds
Money market funds, also known as money funds or money market mutual funds, are full investment products. However, the FDIC does not typically insure them, and you accept more risk when investing in them than in a money market account. Nevertheless, the risk is lower than that of stocks.
With lower risk comes a lower yield or interest rate. But you’ll usually get a higher return than you would with a savings account. Some of the highest-yielding money market mutual funds have rates below 0.50%.
As the Fed raises and lowers interest rates, you may find higher or lower yields on the money market mutual funds out there.
Generally, higher interest rates encourage saving and discourage spending on credit. Lower interest rates aim to do the opposite.
The SEC states money market mutual funds consist of high-quality, short-term debt securities.
As a result, investors typically receive dividends or earnings aligned with short-term interest rates. In other words, money market mutual funds are stable, short-term investments.
Advantages of Money Market funds
The following represent the main benefits of money market funds:
- Can produce decent, short-term earnings.
- Choose between corporate debt and securities, government debt securities, or tax-free funds.
- Lower risk than stocks and other investments.
- High liquidity, meaning you can turn your assets into cash quickly.
Even though money market funds are low risk, that doesn’t mean there’s zero risk. The funds could lose value, resulting in a loss. Also, if the fund goes under or defaults, you could lose your entire investment. Remember, the FDIC does not back these.
Choosing a Money Market account
Don’t just run to your nearest bank or credit union to open a money market account. Because there are many differences between money market accounts, comparison shopping is a must. You’ll likely find interest rates, features, and minimum balance variances.
Annual Percentage Yield
This is the return you’ll earn on your deposits each year. Since money market accounts are low-risk investments, don’t expect to see yields in the double digits. Instead, you’ll probably find rates below 1% right now.
While interest rates are rising, they’ve been at historic lows for a while now. And the lower the risk, the less interest or annual percentage yield you’ll get. But it would help if you didn’t accept the lowest yield.
Compare annual percentage yields between accounts while establishing your desired range. Although you shouldn’t go with the lowest yield, higher yields may come with stipulations you’re unwilling to accept.
Features, including withdrawal limits
As previously mentioned, some money market accounts come with checks and debit cards. Others do not. Checks and debit cards allow you to pay for goods and services like you would with a checking account. You can also make ATM withdrawals and deposits.
Unlike checking accounts, you may face different restrictions. For example, some accounts let you make up to six monthly withdrawals by check or debit card. Others are more limited to three or fewer. Evaluate your needs to determine which limitations will fit the bill.
For instance, some people use money market accounts as an emergency fund and don’t open a regular savings account. If this applies to you, ask whether the withdrawal limits are reasonable. You don’t want to put yourself in a less than ideal situation.
Other features of a money market might include promotions, add-ons, and monthly fees. For example, some money market accounts offer promos and add-ons like a one-year Amazon Prime membership and prepaid gift cards. In addition, monthly fees may be waived or mandatory, depending on your balance.
Minimum Average Balances
Yes, some money market accounts don’t require a minimum balance. These are best if you don’t think you’ll make many deposits. Or you don’t want to worry about maintaining a certain balance and think you’ll be making regular withdrawals.
However, you’ll find a wide variety of minimum balance requirements. Some are as low as $100, while others are $15,000 or more. With higher minimum balance requirements, you may get a boost in your annual percentage yield. But don’t count on it!
Higher minimum average balance requirements may incur extra fees or penalties if you drop below the threshold. As a result, these options are better for investors who plan on mostly leaving their funds to sit. They’re also good choices for individuals with a lot of excess cash to invest.
Should I get a Money Market account?
This depends on your financial goals and other options. For example, savings and interest-bearing checking accounts may offer the same annual percentage yields as money market accounts. In this case, a regular savings account may do just fine.
You’ll still have a highly liquid asset that you can withdraw at leisure. In addition, if you have a checking account with the same bank, you can transfer funds between the two within seconds. This eliminates the need for a second checkbook and debit card during an emergency.
But a CD will always be the better choice if you want to set a chunk of money aside and let it grow for a specific period. It’s low risk but pays higher interest rates. And there isn’t any temptation to touch that money or spend it.
If you don’t think you’ll need it, go with the CD. Otherwise, choose a more liquid option like a money market account.
What about Money Market funds?
Investing in money market funds is a way to diversify your portfolio. Most investors prefer a mix of high, medium, and low-risk securities to balance their returns and risk of loss. Unless, of course, you’re about to retire or are already out of the workforce.
In this case, you can’t afford to lose much value (if any). Investing in more stable, low-risk money market funds can help maintain dividend income and preserve value. On the other hand, those who have decades until they retire might not want as much of their money in low-risk investments.
These individuals will want to invest more heavily in stocks and other securities with higher returns. But that doesn’t mean they should overlook money market funds. These stable securities can reduce risk exposure and protect them from possible losses.
What to look for
With money market funds, you want to evaluate yield, expense ratio, and risk. Of course, not all funds are the same or produce identical numbers. Ideally, you want to strive for higher yields, lower expense ratios, and lower risks.
If the yield of a money market fund is negative or zero over your investment horizon, you shouldn’t put money there. You’ll either lose value or gain nothing. Instead, you’d better park your money in a savings or checking account.
Your expense ratio is determined by any fees in proportion to your returns. You want your returns to outpace your monthly or annual expenses. You can research risk in analyst reports or the reports put out by the fund’s managers.
Final thoughts
Money market accounts and money market funds aren’t the same thing. But both typically offer high liquidity and low risk. Investors who desire these benefits may have one or the other type of investment or both.
Do your research by comparing various options before you hand over your money. For example, money market accounts will give you more flexibility, while mutual funds hedge your risks from other investments.
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