Investing

Investing Options Series: Money Market Accounts

If you’ll remember, last week I began the Investing Options Series with an outline of Money Market Funds. Since they are often confused, I decided to cover Money Market Accounts this week.

What Are They?
A Money Market Account is a form of a savings account offered by banks and credit unions; however, a Money Market Account typically has a higher interest rate than a normal passbook savings account. Similar to any other account held at a bank, Money Market Accounts are federally insured by the FDIC.

Money Market Accounts usually have a higher-than-normal minimum balance requirement (sometimes $100 to $2,500) and only allow 3 to 6 withdrawals per month. In fact, by law you are allowed to make no more than six withdrawals and transfers per month if the transactions are overdraft protection transfers, automatic bill deductions, wire transfers, telephone transfers and PC banking transfers. But at the same time Money Market Accounts act like checking accounts in that you may usually write 3 checks per month from your account (any more and you’ll be hit with fees $5-$15). With most accounts you can even make unlimited deposits and withdrawals from ATMs.

What is the difference between a Money Market Fund and Money Market Account?
The biggest difference between the two types of investments is risk. As mentioned before, Money Market Funds are a collection of short-term mutual funds that are not insured and may (but hardly ever do) fall below the target of $1 per share. In contrast, a Money Market Account is a savings account with no maturity date that is insured against loss.

Different Flavors
There are three basic types of Money Market Accounts according to Bankrate.com:

• The basic account often requires a minimum opening deposit of $100.
• The tiered account often requires a bigger minimum opening deposit than a basic account but pays a higher yield as deposits increase. For instance, an account holder might earn 2 percent interest with a $500 balance, but as much as 5 percent interest or more with a balance of $50,000.
• The package deal offers a money market account in conjunction with savings, certificates of deposits and other bank investments. Banks and credit unions may offer a slightly higher yield to holders of these accounts than to basic- or tiered-account holders. Because this is a package deal, a minimum deposit may be waived.

Short or Long-Term Investment?
I wouldn’t call this a long-term investment because there are other longer-term options out there with higher interest rates. However, you can often get a better return in a Money Market Account than by keeping you extra cash in your passbook savings account or under the mattress. However, unlike other longer-term investments, Money Market Accounts are fairly liquid – allowing you to withdraw money through transfers, checks, and even ATMs.

After having the recommended 3-6 months of liquid assets on hand (cash, checking accounts, short-term CDs) then a Money Market Account is a good place to put some “medium-term” money that you need to save up for a down payment of some kind (car, house, etc.). To keep it simple, the rule of thumb is that Money Market Accounts are good for liquid investments you plan to hold onto for 3-12 months.

Potential Risk
The biggest risk with a Money Market Account is being caught by excessive fees. As mentioned above, some banks charge fees for writing too many checks (more than 3) or for falling below the minimum required balance. Other than the risk of excessive fees though, the fact that this type of investment is insured makes it a fairly risk-free investment.

Potential Return
As of today the best rate on a Money Market Account is 4.8% compounded monthly according to Bankrate.com. This account has a $100 minimum opening balance, but in order to avoid fees, your account must have $10,000. Oh, and $25 is charged as a “monthly service fee.” (see why I said these fees are the biggest risk?) One more thing to keep in mind, however, is the fact that one savings account has a 4.91% interest rate with only a $10 opening balance, $0 in monthly service fees, and the ability to write checks. Basically you’ll need to check with your local banks to see what’s going to bring you the best return.

Who is this a Good Investment For?
Because of the fairly low entrance requirements, Money Market Accounts are for everyone looking to stash some extra cash away for 3-12 months. But as always, you should always shop around and compare what different banks are offering. Things you should look at include:

• What is the minimum opening deposit?
• What interest rate does the account pay?
• Are there higher yields for bigger balances?
• Do I earn higher yields on the entire balance or only part of it?
• Is there a monthly maintenance fee?
• Under what conditions can fees be avoided?
• What is the fee if my balance drops below the required minimum?
• Will the bank waive fees if I have other accounts with them?
• Is there an extra fee if I close out my account early?
• What’s the fee for writing more than three checks a month on the account?
• What’s the fee for using automated teller machines?
• Is there more than one version of a money market account? If so, what are the differences?

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