Are Money Market Accounts A Good Investment?

You are here to understand if Money Market Accounts are a good investment. First of all, let’s state the obvious: investments come in all different sizes with all sorts of risks. Stocks are inherently volatile, hedge funds can be risky, and options contracts can come with big losses.

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.

What Are Money Markets?

Money market accounts (MMAs) are deposit accounts that can be opened at banks or other financial institutions like credit unions. They act like a checking-savings account hybrid, offering both the flexibility of a checking account with the features of a savings account. With an MMA, you can write checks, make transfers between accounts, and conduct debit card transactions, up to a certain limit.

Are Money Market Accounts a Good Investment?

A money market account is a safe way to compound your money, because a money market account is an insured, flexible, and high-interest yielding account from your bank while maintaining a high minimum balance. Backed by FDIC insurance (up to $250,000), money market accounts typically provide higher interest rates than a savings account but do not restrict your access to the funds.

Money Market Account Returns

Money market accounts (a.k.a. Money Market Deposit Account or MMDA) 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.

Advantages of a Money Market Account

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 typically higher (although not always), but comes with limitations.

Compared to a CD, you’ll have access to your money when you need it. Since it works like a checking or savings account, you can access your money through ATMs and checks. You’ll also earn tiered, compounded interest credited to your account on a monthly basis. The higher your balance, the more your account will grow.

Money market accounts are easy to get – Costco and other large companies offer accounts to members as a perk. Even when interest-bearing account rates are low, you can still get better rates than what’s offered as standard to the public.

Other benefits include easy liquidity, stable principal, and they’re FDIC insured, which is why they’re considered risk.

Disadvantages of a Money Market Account

Banks typically require a high minimum balance to be met and/or charge monthly service fees.

For example, most banks require at least a $2,500 daily balance while others require $5,000 or more. Accounts must also be limited to a certain number of transactions per month. If you have an emergency and need access to your money, you might end up getting a fee for going over your allotted monthly transaction limit.

Fees are charged for account maintenance, transactions, and other financial services related to the account. This can make a money market account more costly than a savings account. You’ll need to keep a high balance to earn enough interest to counteract the fees. Each time a fee is deducted from your account, your balance decreases and so does your earned interest.

One of the biggest disadvantages of a money market account is the variable interest rates. Interest rates are always fluctuating, and you have no control over this.

Is a Money Market Safe?

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. Once these investments mature, the bank splits the return with you, which is why you end up getting a higher rate. 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.

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.

Also, don’t confuse a money market account with a money market fund (MMF). An MMF is an investment product that does not provide FDIC insurance coverage and is purchased through an investment broker.

Which Money Market is Best for You?

The difference between money market accounts and savings accounts boils down to rates and access. To decide which type of money market is best for you, consider your reasons for setting this money aside along with these factors:

  1. Know Your Risk. Money market accounts are generally safe and conservative, but some have slightly riskier investment options than others. Be sure to choose one that is within your comfort zone.
  2. Check Your Minimum Balance Requirements. Choose an account with a minimum balance requirement within your means. Keep in mind that dipping below the minimum means penalties will apply.
  3. Watch For Withdrawals. Pick a fund that allows withdrawal privileges that work for you.
  4. Don’t Forget About Fees. All money market accounts come with some bank fees and charges. Make sure you read the fine print and understand monthly and annual fees, as well as penalties, before deciding on an account.
  5. Go Interest Shopping. Although you shouldn’t expect too much of a difference in interest rates from bank to bank, the percentages can vary. Because some online banks have lower internal costs and overhead, they can offer higher interest rates.

Now that you’re ready to open a money market account, click here to compare and make sure you are opening a safe, insured, investment opportunity.

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