Credit Loan > Checking and Savings Accounts > Is Investing In Money Market Funds Right For You?

Money Market Rates & Accounts

A money market deposit account is something of a combination between a savings and checking account with the advantages of both. The savings account aspect is that it is an interest-bearing vehicle, but it also has features that allow checks to be written, though within limits.

Traditionally one of the disadvantages of such accounts has been the necessity for a substantially higher minimum balance than most of us can maintain in a checking account. A money market account is not the one a person uses when her standard banking practice is to hope the paycheck deposits before the rent check bounces. At least not if one wants to avoid the kind of fees that make over-draft fees laughable.

This is changing somewhat with the advent of online banking. The low overhead involved in not having a brick and mortar location allows for minimum balances to maintain the higher interest rate. Restrictions will still apply on how the balances are maintained and interest rates will vary between institutions as well.

A money market account pays a higher rate than a regular savings account. This is due to the fact that the formatting differences and restrictions on the account allow the bank to invest the money in ways that allow for higher returns than the money in standard accounts. The primary aspect of this is that the money is intended to stay in the account rather than in the pocket of the investor. This means that there are limits on what kind of transactions can be performed on the account, how often and what form they take. While there are certain restrictions that will apply to all accounts, banks are free to add more, though they also posses some leeway which can make account access more comfortable for the user.

Whereas standard savings accounts have interest rates that hover around 1% APR or less, money market rates pay upwards of 3% depending on the institution and deposit. As always, with any form of investment, it is important to be cognizant of any restrictions on use of the account, as well as making certain of the legitimacy of the institution with whom one is investing.

Finally, money market accounts are not to be confused with money market funds, which involve the buying of the debt that banks sell to one another to maintain the flow of paper on a daily basis. Each type of account has it risks and rewards, but they are separate investment tools, and as such, should be investigated separately.