Socking money away into a savings account can help you make sure you have money when you need it, but standard savings accounts typically offer poor interest rates. A money market account is an interest-bearing account that can be used as an alternative to a standard savings account. Money market accounts offer several notable benefits and drawbacks versus other investment options.
The main benefit of money market accounts is that they tend to pay more interest than standard savings accounts. The rates you can earn in money market accounts are similar to those offered with certificates of deposit -- or CDs. The primary difference between CDs and money market accounts is that with CDs you earn a fixed amount of interest for a predetermined amount of time, while the interest rates on money market accounts can fluctuate. This can be an advantage or a disadvantage depending on the direction of interest rates. When interest rates are rising, a money market account is preferable because your rate may adjust upward. When rates are falling, being locked in at a higher rate offered by a CD is advantageous..
Access to Funds
Money market accounts often carry limits on how access to your money. For example, an account might allow five withdrawals per month. In addition, with a money market account you may be required to maintain a minimum account balance to get favorable interest rates. Savings and checking accounts generally don't have restrictions on withdrawals. On the other hand, money market accounts allow more flexibility than CDs: When you open a CD, it has a predetermined maturity date and you usually pay a penalty or forfeit some of your interest if you take your money out early.
Money market accounts are eligible for insurance backed by the Federal Deposit Insurance Corporation. FDIC insurance applies to deposits of up to $250,000. This means that you can't lose the money you put into a money market account as long as your bank insures its accounts and you deposit $250,000 or less. Even if your bank goes out of business, the government will make sure you get your money.
When you save or invest money for the long term, a small difference in your annual return on investment can make a big difference in the amount of money you end up with. Many people choose to buy assets like stocks, real estate or mutual funds as long-term investments because they have the potential to produce much higher returns than those available with interest-bearing accounts. It is possible to lose money when you invest in stocks and other assets, but over the long haul, investments typically outperform interest-bearing accounts.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.