"Better" is really a tricky word. Always fake taking a phone call if she asks if so-and-so is "better" looking than she is. If he asks, "So, am I the best?," plead the Fifth. A similar conundrum exists when determining if one savings or investing vehicle is better than the other. It really depends on several factors, including how much cash you have and what you're looking to do with it.
If you don't have an emergency fund--equal to about three to six month's of expenses--get one up and running. Generally, a money market account is a good place to stash emergency cash. You'll earn modest interest and have relatively quick access to your bankroll. If, however, you have that base covered and you're looking to make your money grow for a long-term goal such as a kid's college tuition or retirement, a money market fund might be too conservative a choice for your loot. If, however, you like the idea of having cash in a relatively safe place, keep a portion of your money situated in a money market account.
Types of Money Market Accounts
Decide between the two types of money market accounts if you choose to go with one. As the Motley Fool notes, you can go with a money market deposit account or money market fund. The former generally refers to a bank product that is FDIC-insured. They're liquid savings vehicles that won't lose value; however, you may face fees for making too many transactions or letting your balance drop below a minimum. Brokerages and mutual-fund companies tend to provide money market funds, which invest in conservative investments such as certificates of deposit. While a money market fund can lose value, it's uncommon. They offer similar liquidity--access to cash--and stipulations as money market deposit accounts. If you'd like to be on the ready to send money market dough toward a different type of investment, a fund is probably the better choice. If you want to make fee-free ATM withdrawals at a major bank go with the deposit account.
Strategy and Alternatives
Your goals and the time horizon for when you need to your money dictates how you should allocate your investments. If you're young, a money market account--either type--probably should be a relatively small part of your savings and investment portfolio, particularly if you have the emergency fund covered. In this case, you'll want to favor stocks, which, as the U.S. Securities and Exchange Commission notes, have provided the best historical investment return. Favor stocks of several sizes, in several sectors and in several parts of the world. Your best best might be investing in mutual funds, which make it easier to diversify. Round out your holdings with bonds and a small amount of cash on hand.
Asset Allocation Example
Play with the Iowa Public Employees' Retirement System asset allocation calculator for a while (see Resources). It can help you determine how to situate your portfolio. If you're 25 years old, currently have $5,000 saved, can invest $2,500 a year, are in the 25-percent tax bracket, require no current income from your investments, have a high tolerance for risk and expect a so-so economy, you should have only 8 percent of your wad in cash. More than 80 percent should be invested in a mix of large-cap, mid-cap, small-cap and foreign stocks, which, again, you can realize via a mutual-fund portfolio. A money market account is appropriate for that 8 percent, which will increase as you get closer to retirement.
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- Do You Have to Keep a Minimum Balance at a Bank?
- The Difference Between a Checking Account and a Money Market Account
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