Key takeout
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Money Market Account combines the features of a checking and savings account and has FDIC or NCUA insurance up to $250,000 per depositor.
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Money market funds are not federally insured or regulated, but are considered conservative investments with a very low risk of inherent losses.
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Money Market Accounts are ideal for emergency funds and short-term savings targets thanks to their liquidity and competitive interest rates.
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Money market funds are suitable for investors who are trying to temporarily hold cash in their securities accounts while waiting for investment opportunities.
Money market accounts and money market funds have similar names and serve similar purposes, but it is important to understand that these two financial instruments have several important distinctions and nuances that can affect which options are suitable for your financial situation.
What is a Money Market Account?
A money market account, also known as a money market deposit account, is a liquid bank account with federal insurance. They pay interest on your deposits, but the chances of your profits vary depending on your bank. Currently, top money market accounts pay APYs above 4%, while the average bank pays just 0.49% in savings accounts.
Money Market Account combines both check account and savings account features. They usually pay higher interest rates than standard savings accounts, providing limited check writing ability and debit card access that you won’t get with a basic savings account. These accounts are provided by banks and credit unions, not by investment companies.
Please note that there are transaction restrictions. Typically, you are limited to six withdrawals per billing period. If you exceed that limit, you can pay. Interest earned on these accounts is also subject to taxation.
Is Money Market Account secure?
If you are concerned about the security of cash on your money market account, you can rest those concerns. The bank or credit union you deposit will enjoy insurance coverage of up to $250,000 if your money fails if the financial institution fails if it is part of the Federal Deposit Insurance Company (FDIC) or the National Credit Union Agency (NCUA) network.
What is a Money Market Fund?
Money market funds have been around since the 1970s, but have evolved considerably since their founding. Today, they vary based on the type of investment allocated for fund money. Some invest primarily in the US Treasury Department, while others primarily invest in corporate and bank debt securities.
Money market funds, also known as money market mutual funds, do not have federal insurance. However, these are still relatively safe liquid investments. Instead of paying the set interest rate, returns come from the underlying investment held in the fund and are derived by deducting the costs required to manage it. Also, you don’t have access to funds, like money market accounts. Instead, you will need to start transfers from your broker account and it may take more than one business day for your funds to be posted to your account.
There is also a tax-free money market fund, which invests at least 80% of its portfolio in city securities. In fact, in some cases, you may be able to purchase stocks in money market funds that aim to invest in securities in the state you reside in.
Are Money Market Funds Safe?
Money market funds are investments, and every investment has some risk. Money market funds aim to maintain a price of $1 per share, and almost everyone has done so, even in the most intense market environments, including the 2008 financial crisis and the 2020 pandemic-induced sales.
However, it can “break your investment” and return 95 or 99 cents to the investor for each investor. Large securities and mutual fund companies move between heaven and earth to maintain their net worth of $1. But remember: there is no guarantee for that $1 mark.
It is also important to note that despite the remote potential of losses, money market funds represent some of the most conservative investments available. After the financial crisis of 2007 and 2008, the government implemented new rules to limit the risks of money market funds and make those remote risks even more remote. With money market funds, you can be sure you’ll lose a big chunk of money, not dealing with sudden volatility.
The difference between money market accounts and money market funds
Money Market Account
- It was opened by a bank or credit union.
- Federal deposit insurance protection is included.
- Funds earn fixed interest rates that vary depending on the bank and credit union.
- Often, transaction limits come with 6 cases per month.
- Perfect for emergency fund holdings and short-term savings goals.
Money Market Fund
- It opened at a securities company.
- It’s safe, but there is no insurance for losses.
- Funds are invested in a variety of low-risk short-term securities with varying values.
- There are no restrictions on withdrawals and transfers.
- Perfect for securities accounts with convenient features to make quick investment decisions.
- You can usually earn higher interest rates than your money market account.
Which is better: Money Market Account or Money Market Fund?
Money market accounts are particularly attractive options for emergency funds as they are secure and accessible. For example, if your auto repair or emergency room bill has an unplanned fee of $1,000, you can pay the bill directly from your money market account, or transfer funds from your money market account to your current account to pay the bill.
With a combination of liquidity and revenue potential, money market accounts are also a good option to save on short-term goals such as holidays, weddings, and down payments.
But if you have money to invest quickly, the money market fund could be better first. Think of it as an opportunity fund: if there is market pull, or if you find an attractive investment option, the money market fund will give you the ability to act quickly.
Conclusion
Money market accounts may be the ideal choice for those looking for federal insurance security and for a wide range of interest rates, particularly for emergency funds. Investment-oriented money market funds are ideal for those looking to take advantage of market opportunities, although somewhat risky.
Understanding these nuances is key to making informed choices that match your particular financial situation. After comparing two accounts, it is also a good idea to compare options from different banks, credit unions, or brokerage companies, as they may offer different fees and perks.