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Money market accounts and money market funds are two low-risk options for your savings, and they both tend to offer better returns than traditional savings or checking accounts. However, in spite of the similar name, money market accounts and funds are actually very different. Here's how they work.
What Is a Money Market Account?
A money market account (MMA) is a type of savings deposit account, similar to a regular savings account at a bank.
As with savings accounts, you'll often receive a higher interest rate than you'd get from a checking account. And MMAs are generally covered by Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA) insurance at banks and credit unions, respectively, protecting you in case the financial institution fails.
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Also like some savings accounts, you may be limited to making six withdrawals each month. Financial institutions are no longer required to impose that limit, however, and transactions that are in-person, mailed, at an ATM or requested by phone don't count toward the six withdrawals.
Unlike savings accounts, MMAs often come with checks or a debit card that you can use to access your funds. MMAs may also offer an even higher interest rate than some savings accounts—although this isn't necessarily true when compared to high-yield savings accounts online.
You can open MMAs at traditional banks, online banks and credit unions. However, they tend to have a higher minimum opening balance requirement than savings accounts, and your interest rate may depend on your ongoing monthly balance.
Pros and Cons of Money Market Accounts
Money market accounts work a bit like a hybrid between a checking and savings account, making them a more convenient way to earn interest on your savings. But consider the pros and cons.
Pros
- Widely available
- Comes with checks and/or a debit card for easy access to your money
- Higher interest rates than traditional savings accounts
- Up to $250,000 per account, per account holder could be covered by insurance at each financial institution
Cons
- May have high minimum balance requirements to open an account
- Fees or a lower interest rate if you don't maintain a minimum monthly balance
- Potential limitations on how many convenient transactions you can make each month
- Lower interest rate than some high-yield savings accounts that have fewer restrictions or requirements
What Is a Money Market Fund?
Money market funds (MMFs) are specific types of mutual funds that you can invest in using a brokerage account. The funds make relatively safe investments and give you a share of the profits as dividends. Similar to earning interest in a money market or savings account, you may receive monthly dividends that you can reinvest or cash out.
The three types of MMFs are distinguished by their holdings:
- Government funds: Invest at least 99.5% of their assets in U.S. government securities and repurchase agreements (repos)—when the government agrees to sell and later repurchase a security.
- Municipal or tax-exempt funds: Generally invest at least 80% of their assets in local and state municipal bonds, which offer earnings that are exempt from federal income taxes. There are also state-specific funds with earnings that are exempt from that state's income tax.
- Prime or general purpose funds: Invest in short-term government and corporate securities, such as bonds and certificates of deposit.
You'll need to open a brokerage account before investing in an MMF, and some funds have high minimum investment amounts. However, unlike many other types of mutual funds, MMFs try to maintain a $1 per share valuation. As a result, you can often sell your investment to get cash without worrying about market fluctuations. But it could still take several days to sell shares and transfer the money to a bank account.
Unlike checking, savings and money market accounts, FDIC and NCUA insurance don't cover the funds in an MMF. Securities Investor Protection Corp. (SIPC) insurance also won't apply because your money is invested rather than stored as cash in a brokerage account. And although the funds are generally a safe investment, there have been times when funds "break the buck"—the shares temporarily drop below $1 each—and investors who sold their shares when values were down lost money.
Pros and Cons of Money Market Funds
A money market fund can be a good place for your short- and medium-term savings, but it's not the best fit for everyone.
Pros
- Some funds don't require a minimum investment
- May offer higher returns than checking, savings or money market accounts
- Earnings could be tax-free and may quickly change to reflect rising interest rates
Cons
- Some brokerages charge trading fees
- Might offer lower long-term returns than riskier investments
- The investments aren't covered by insurance in case the fund manager or brokerage fail
When to Consider an MMA or MMF
Money market accounts and money market funds both have their pros and cons, and either option can work well if you're trying to earn more interest than you get with a traditional savings or checking account.
In general, an MMA might be best if you want an account with a high interest rate and few fees that provides easy access to your cash. Just be sure to also compare the account's returns and fees to other high-yield accounts from other banks and credit unions.
An MMF might offer an even better return, especially if you can't meet large deposit requirements for an MMA. However, you won't be able to access your money immediately, and there's more risk involved. If that's a worthwhile trade-off for you, then an MMF could be a better option.
Compare All Your Options
Although there are general trends among money market funds, money market accounts and other types of deposit accounts, the specifics can vary significantly from one account to the next. If you're looking for the best place to keep your savings, compare the accounts' requirements, returns, fees and options for accessing your money. And make a point to regularly review the options—particularly when interest rates are on the rise or fall.