Money Market Accounts

Of the various types of investment vehicles available, money market accounts are bank accounts that invest in vehicles such as government securities.

There are two sources where you can invest in money market accounts: mutual funds and savings institutions. This discussion concerns money markets you invest in through institutions such as banks and credit unions. Please see our discussion of mutual funds for the particulars on investing in money markets through mutual funds.

Money market accounts are very similar to traditional savings accounts offered by financial institutions. They are guaranteed by the federal government through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per account, subject to certain conditions. Also, there's no specific time period that your money has to be invested for--in other words, unlike certificates of deposit (CDs), there's no penalty for early withdrawals. Like certificates of deposit, though, money market accounts typically earn higher interest than traditional savings accounts.

So what's the catch? Well, first of all, money market accounts require a minimum deposit. Typically, the minimum starting deposit and minimum balance you must maintain is at least $500, and usually at least $1,000. Many financial institutions offer interest rates based on the amount in your money market account. This means that a money market account with a $100,000 balance will earn a higher interest rate than a money market account with a $5,000 balance.

Other features of money market accounts vary depending on the financial institution you obtain them through. For example, some money market accounts function as a checking account as well. Some financial institutions charge a maintenance fee for their money market accounts. In addition, how interest is calculated can vary. Some money market accounts earn interest daily while others earn it on a monthly basis. The interest rate itself is usually locked in monthly, but for some money market accounts the interest rate changes daily.

Should you invest in money market accounts? Is this the right type of account for you? If you're looking for a safe, stable investment where you can keep funds that you might need access to without restriction, if you have a sizable amount to deposit, this type of account is a good choice for you. A money market account is also a good choice for you if you are nearing or at retirement, or perhaps even at the middle stage of your life and you want to keep a sizable sum in a very safe investment for a longer term. While in this case a certificate of deposit might also be worth looking into, with a money market account you won't be subject to the restrictions that come with investing in a CD, but your interest rate will be comparable and certainly higher than a traditional savings account.

Warning Please be careful to keep track of money going in and out if you use the check writing privileges offered with your money market account. With most money market accounts, if your balance drops below a certain amount at any time during the month, you may earn less interest or be charged fees for maintaining the account.

Interest earned on money market accounts is considered income for tax purposes.