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Money Market Accounts

Money Market Accounts

            The term "money market account" is one that many of us have heard, but when pressed to define its meaning, a majority of people will scratch their heads. So what exactly is a money market account? A savings account? An investment vehicle? The answer is…both.

            Offered by banks and credit unions, money market accounts have many of the characteristics of a traditional savings account, but also add a safe, conservative element of investment. The money you deposit in this type of account is usually invested in short-term, fixed-income securities, such as U.S. Treasuries.

            Money market accounts often require a larger initial deposit to open, and may require that the account balance be maintained at a certain level. In return, they tend to offer higher interest rates than many savings accounts. Often, the larger your account balance, the higher the interest rate you will earn.

            In terms of easy access or liquidity, money market accounts fall between a traditional savings account and a certificate of deposit. Unlike CDs, which charge a significant penalty for early withdrawals, you may withdraw your money from a money market account at any time. However, the number of withdrawals allowed per month is typically less than what’s allowed for a traditional savings account.

            The chief disadvantage of money market accounts is that they don’t always keep pace with inflation over the long term. For this reason, money market accounts are often opened by customers who are looking for a temporary place to "park" a large sum of money while deciding where to ultimately invest it or use it to pay an anticipated large expense.

            There are two types of money market accounts – deposit accounts (MMDA) and mutual funds (MMMF). Like regular 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.  MMMFs are not FDIC insured; so there is a slight risk that if their value dips you could lose money. During the economic crisis of 2008 – 2009 (and some say it continues for 2010), the U.S. Treasury stepped in and temporarily guaranteed that investors in many MMMFs would not lose their original investment value. This slightly higher risk for MMMFs usually translates into higher yield than for MMDAs.

            Money market accounts will probably never generate the talk-about-town that high earning stocks do but they can be a convenient, relatively safe place to store dollars while considering other options.

 

 

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