Investing 101: Money Market Accounts

By on January 11, 2018

When people have some cash on hand – for emergencies or a special purchase like a car or vacation – they tend to hold it in a traditional savings account at their bank. While traditional savings accounts are useful and secure places to put money while they earn a little interest, a money market savings account could help an you pick up a little extra cash without added risk.

These savings accounts are very similar; while neither is expected to make you wealthy, it is important to understand the slight differences and types of money market accounts available to help you decide which is right for you.

What are Money Market Accounts?

When you save money in a money market account it earns interest just like in a regular savings account. The bank pays you a little interest in exchange for being able to use your money to fund loans to other people (they charge a higher interest on these loans to pay your interest and keep the difference).

Unlike a traditional savings account, the banks tends to pay a higher interest rate for having the option to use the money in other ways and may provide the account holder with limited check-writing ability. On the other hand, these interest-bearing money market accounts come with their own set of restrictions.

Basically, it works like this:

  • Open a money market account at the bank or with your trusted financial advisor.
  • A minimum balance is often required and/or used to determine how much interest the account will earn.
  • The money in the account earns interest (rates will vary by institution or deposit amount).
  • Interest (usually) compounds daily and is added to the account monthly.
  • There may be restrictions or limits on the number of withdrawals or checks written from the account (based on a mix of government regulations and bank policies).

2 Types of Money Market Accounts

There are two types of money market accounts – money market deposit accounts (MMDA) and money market mutual funds (MMMF). Both types offer account holders a higher rate of return than traditional savings accounts, easy access to money with check-writing and/or money-transferring privileges, and protections from the risk of losing principal deposits, however, there are a few key differences:

1 – Money Market Deposit Accounts (MMDA)

A money market deposit account is a type of savings account offered by banks and credit unions. Like traditional checking and savings accounts, MMDAs are guaranteed by the government, either through the Federal Deposit Insurance Corporation (FDIC) for banks, or the National Credit Union Administration (NCUA) for credit unions.

MMDAs usually grow at a slightly faster rate by earning 1-5% higher interest than a traditional savings account. They may require a higher minimum balance (sometimes $1000-$­2500, but also as low as $1), and tend to restrict account holders to 3-6 withdrawals per month.

One major benefit of most MMDAs is the ability to write up to three checks each month. This is excellent for someone in need of a separate savings account to pay for a specific goals, such as a kitchen remodel or car. Car loans, contractors, materials, etc., may be budgeted and paid for directly from the account assigned to that purpose.

2 – Money Market Mutual Fund (MMMF)

Money market mutual funds are a pooled savings account which invests in short-term (less than one year), fixed-income securities to preserve the amount invested by maintaining a net asset value (NAV) of $1 per share. Since these accounts are managed by the fund there is a usually a small fee charged.

Although considered very safe investments, MMMFs are not FDIC insured, however, they are relatively safe securities representing liquid debt and monetary instruments which are almost always able to return a small (but not guaranteed) rate of return. And though MMMFs usually pay a higher yield, they may not always be the better deal when income taxes are taken into account.

There are two types of money market funds, taxable and tax-free. Tax-free MMMFs are exempt from income taxes but tend to offer a very small rate of return – you may not earn enough to stay ahead of inflation, but it could be a good low-risk option for balancing your portfolio. Taxable MMMFs offer some perks in exchange for tax liability and risk.

Most investors will come up against these three taxable money market funds:

  1. General-purpose funds are available to all investors through a mutual fund company sponsor
  2. Stockbroker-affiliated funds are also general-purpose funds, however they may be part of a package of broker services
  3. Special-purpose funds are organized for individuals who have a particular affiliation, such as customers of a certain bank or special interest group

The Drawbacks

The principal drawback of money market accounts is that they are not always able keep pace with inflation in the long-term. They often come with a host of restrictions and limitations, so you may not always have easy access to your money or lose any earned interest in fees.

Ask Your Financial Advisor, Banker or Broker About the Benefits a Money Market Account in Pursuit of Your Financial Goals

If you need a place to save your money and earn a little bit more than a traditional saving account, a money market account may be the investment tool for you. Investors who require a safe investment vehicle with stability of principal, a low degree of risk and liquidity are smart to hold their money in a money market account.

Speak with a trusted financial advisor, banker, broker or fund manager to find a money market account with the right interest rate, fees and privileges to help you reach your financial goals. Whether you want to hold a separate account for emergencies or a special purchase, or simple store some cash until you are ready to re-balance it in your portfolio, money market accounts could be the tool you need to make a little more money!

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About Harold Goldman

I am the founder of, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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