Are Money Market Accounts A Good Investment?

Many financial experts consider money market accounts a good investment. If you are looking to earn more interest than what your savings account provides, a money-market account may be right for you. Money market accounts are a good investment if you want a safe way to grow your money and can afford to maintain a high minimum balance, among other requirements.

Are Money Market Accounts a Good Investment?

The answer is yes if you are looking for an insured, flexible, and high-interest yielding account from your bank while maintaining a high minimum balance. Backed by FDIC insurance, money market accounts typically provide higher interest rates than a savings account but do not restrict your access to the funds.

If you are looking for a safe way to compound your money, Money market accounts (MMA) are a good investment. MMA’s provide the accessibility of a savings account with the earnings of an investment account. In regards to earning potential, you can think of them as somewhere between a certificate of deposit (CD) and a savings account. The higher amount invested in an MMA will lead to a higher interest rate, and thereby a greater return on investment. As opposed to a CD, which requires leaving the money untouched for a long period of time, MMA’s allow more accessibility to the money (including writing checks from the account’s funds), making it suitable to grow funds that you might need in the relatively near future.

Practically speaking, a bank can only use savings account funds to make loans. With MMA’s, banks are able to deposit the money into low-risk investments on your behalf, such as CD’s or government securities. Since the bank is assuming the risk, MMA’s are a safer option than investing the money yourself, as the funds are insured by the Federal Deposit Insurance Corporation (FDIC), making money market accounts a good investment.

While they are a safe investment, make sure that you understand the terms and conditions that MMA’s entail. Money market accounts are a good investment if you can maintain a high minimum balance, limit your withdrawal of the funds, and understand that you are not protected against inflation. Compared to a savings account, the annual percentage yield (APY) of an MMA is higher, but comes with limitations. Banks typically require a high minimum balance to be met and/or charge monthly service fees. Accounts must also be limited to a certain number of transactions per month.

Why Some Experts Don’t Consider Money Market Accounts a Good Investment

Critics of money market accounts point out that interest rates for these investments are not as high as they used to be. In fact, today’s MMA rates may even be comparable to a basic savings account. Furthermore, MMA’s are not protected by the changing rates of inflation. Practically, this means that your money might not increase enough in value (through interest) to cover the decrease in value (from inflation). This is true, however, for all interest-earning checking and savings accounts (not including certificates of deposit [CD]). To make money market accounts a good investment, make sure you understand the earnings potential and limitations compared to other types of accounts.

Finally, make sure that you don’t confuse a money market account with a money market fund (MMF). An MMF provides no FDIC insurance coverage and are purchased through an investment broker.

Use this website to recognize the difference between a money market account vs. a money market fund, and make sure you are opening a safe, insured, investment opportunity.

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