What is a Money Market Account?
The basic definition of money market account (MMA): A federally insured savings account that requires you to keep a minimum balance, limits the number of monthly transactions, and for which interest rates are based on market interest rates.
And because banks have some assurance that you will maintain the minimum balance, they will usually reward you with a higher interest rate than they offer for a regular savings account -- sometimes as much as 1% higher.
The main advantage of money market investing versus keeping funds in a regular savings account is the higher rate of interest.
The main disadvantage is if your balance drops below the minimum requirement, you might be charged a penalty that could offset the gains of the higher interest rate.
Also, it's important to note that money market deposit accounts are not the same as money market funds.
Money market funds are products of investment and insurance companies and are therefore not federally insured. This doesn't mean that money market funds are not safe investments; it just means they are not as safe a money market deposit accounts.
What Are Money Market Accounts Best Suited For?
If you ask an investment advisor what an MMA is best suited for, they will usually tell you they are best for parking cash in between investments. And while that might be true for people who have large sums of money to invest, it doesn't mean much to the average working family.
If you ask me what MMAs are best suited for, I will tell you that they are my preference when it comes to building and storing personal finance emergency funds. After all, MMAs ...
- Are insured.
- Pay a higher rate than a regular savings account.
- Discourage frequent withdrawals.
- And most come with a checkbook that you can write up to three checks from per month.
Perfect!
However, before you can open an MMA for building and storing personal finance emergency funds, you will likely need to begin building your fund in a regular savings account until you have saved up enough to meet the minimum deposit requirement (usually $1,000 or more) that comes with an MMA.
Fully Funded Emergency Fund?
Once you have 3-6 months of income sitting in your money market account, the next step depends on whether or not you have high-interest debt.
If you do have high interest debt, then your next step should be to begin investing in your debt.
Why? Because it simply doesn't make sense to earn 1% on your money when you can earn 18% on your money by paying off high-interest debt.
If you have managed to pay off all of your high-interest debt, since an MMA is normally considered to be a stepping stone between a regular savings account and a Certificate of Deposit (CD), the next step might be to begin making periodic purchases of certificates of deposit. But here again you will need to accumulate the minimum amount needed to purchase a CD.