Do You Need a Money Market Account?
When idly browsing your bank’s website for fun (you do that, right?), you might see the phrase “money market account.” But what exactly is a money market account?
In short, you can think of it as a savings account on steroids—it’s a type of bank account that requires more money to operate, but it has the potential to earn you more too.
Money market accounts (MMAs) may have a higher minimum balance or opening balance, and more restrictions on how you withdraw your money, says Tonya Oliver-Boston, Certified Financial Planner™ with LearnVest Planning Services. In exchange for jumping through these extra hoops, MMAs generally offer higher interest rates than regular savings accounts, meaning you’re earning more money on your savings. Like other savings accounts, MMAs are available at banks and are subject to FDIC insurance (or protections for credit unions).
To help you maximize your dollars while avoiding potential pitfalls, we’ll first break down the difference between MMAs and the all-too-similar-sounding money-market funds, and once we’re clear, help you figure out if a money-market account could be the right savings vehicle for you.
Money Market Account vs. Money Market Fund
As we just learned, a money market account (MMA) is basically just a high-interest savings account—but a money market fund isn’t a bank account at all. It’s actually a mutual fund you can get through your brokerage, and therefore lacks the FDIC protection afforded to bank accounts.
Money market funds are still seen as safe investment instruments because they invest in things like CDs and Treasury bills, which may have less risk than stocks and bonds. For that reason, you can think of money-market funds as a short-term place to park your investing cash in relative safety.
All the same, these funds are still riskier than money market accounts. Money market funds maintain a target share price around $1, so it may cause a panic if a fund should “break the buck,” or reprice its shares below a dollar. This has only happened twice in history—most recently in 2008 following the Lehman Brothers meltdown—but it shocked investors enough that the U.S. Treasury has mulled as-yet-unpassed new rules to make money market funds safer in the future.
“With a money market fund, there’s going to be more risk involved than with a money market account,” says Oliver-Boston, “and as a principle, the more risk you’re willing to take, the better the potential reward.”