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Money Market Accounts and Funds

In most states, the typical bank offers this basic lineup of accounts:

  • Checking Accounts - some pay interest, some do not.
  • Savings Accounts - pay interest and usually do not limit withdrawals.
  • Money Market Accounts - also called Money Market Deposit Accounts. Pay more interest than Savings Accounts and limit the frequency of withdrawals.
  • Certificates of Deposit (CDs) - pay the highest interest rates. Penalize you with complete or partial loss of interest for withdrawals before maturity.

The general rule is, the less access you have to your money and the longer it is left on deposit with the bank, the higher the rate of interest you will get. However, there are some intriguing exceptions. Some banks offer so-called High Value Checking Accounts (or something similar) that actually pay more interest than CDs with long maturities.

Money Market Accounts at banks are easily confused with Money Market Funds, also called Money Market Mutual Funds. Money Market Funds have these qualities:

  • Money Market Funds are not FDIC insured.
  • Mutual fund companies or brokerage firms, not banks, offer Money Market Funds.
  • There have been rare instances when the net asset value (NAV) of a Money Market Fund has dipped below the target of $1.00 per share. In these cases, investors making withdrawals lost some principal. This danger is real but rare.
  • Money Market Funds often allow you to write checks on the account. There tend to be fewer restrictions on withdrawals than with bank Money Market Accounts and often no restrictions at all.
  • Some Money Market Funds invest in municipal securities, making them free from federal income tax and possibly also from state income tax as well.

When you shop around for a place to park your cash, these are the main considerations that you must balance against each other:

  • Whether your principal is insured
  • Access to your money (how, when, and how often)
  • Interest rate
  • Convenience of doing business. Internet banking and investing appeals to many people in this regard.

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