As you accumulate some savings, you will need to figure out the best place for them. Traditional savings accounts tend to offer interest payments, but they can be quite low. So a good alternative is a money market fund. But how do money market funds differ from bank accounts? What is a money market account? Let’s discuss these options in further detail!
What is a Money Market Fund?
A money market fund pools money from many individuals to invest in several high-quality, short-term securities. When these are investment accounts, they function more like cash accounts as your funds are easily accessible. They may not provide as high a return as you would get by investing in the stock market, but they are less risky than stocks and have better returns than an interest-bearing savings account (although the returns are not guaranteed).
The performance of money market funds is closely aligned with the interest rates set by the Federal Reserve. But when interest rates are quite low, these funds may not outperform a savings account. Therefore, it’s important to do your research before investing in such a fund.
These money market funds may have a minimum initial investment plus balance requirements and transaction fees. They also attract associated bank fees, as well as the expense ratio or a percentage fee charged on the fund for management expenses.
The dividends on these funds can be taxable or tax-free – it all depends on what the fund invests in. Money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC) but they are carefully regulated by the Securities and Exchange Commission (SEC).
What is a Savings Account?
Savings accounts at banks and credit unions are safe and convenient for storing your money. These are the perfect sinking funds (or a method to save up for a big purchase). You can use these savings accounts to save your emergency funds. Also, you can access your funds from your savings account whenever you want. So this is why banks pay low interest on savings account balances.
Although savings accounts are interest-bearing, these payments are lower than you would receive on money market accounts or money market funds. But some online banks offer high-yield savings accounts with competitive interest rates. Savings accounts are also insured by the FDIC or the NCUA.
What is a Money Market Account?
You should note that a money market fund is not the same as a money market account. Although they seem similar and people confuse the two, they are different. These money market accounts are similar to savings and checking accounts.
Money market accounts often have a higher minimum investment threshold and balances than regular savings accounts, but they attract higher returns. These accounts also allow a limited number of checks or facilitate limited debit card purchases. They may also require monthly fees, but with careful research, you should be able to find an account that has no monthly fees.
Money market accounts are often held at banks and credit unions. They are also FDIC-insured if they are at a bank and are insured by the National Credit Union Administration (NCUA) if they are at a credit union.
You should note that interest rates, fees, and balance requirements can vary considerably. So you should find an account with good returns and minimal fees that will save you money in the long run.
How Does a Money Market Account Compare With a Savings Account?
What are the core features and suitability of the money market and savings accounts? Let’s compare the two options:
- Money Market Accounts offer a higher interest rate compared to savings accounts, but function like checking accounts. They also have a high minimum balance to get the best return and are FDIC-insured in banks and NCUA-insured in credit unions.
- Savings Accounts offer low-interest rates (except for high-interest online savings accounts) and no minimum balance requirements. They are also more liquid than money market accounts and can be easily accessed. These accounts are FDIC-insured in banks and NCUA-insured in credit unions.
- Money Market Accounts are ideal if you’re looking for higher interest rates and can maintain the required high account balances.
- Savings Accounts are best for easy access to your money and low minimum account balances.
How Safe is a Money Market Account?
A money market account is FDIC-insured (or NCUA-insured in credit unions) so they are fairly safe. However, money market funds are not insured by FDIC or NCUA, so you could lose the money invested in these funds.
Money Market Funds and Wealth Creation
Money market funds are investments in short-term securities like US Treasury bills and commercial paper. These funds are used to maintain stable asset values with high liquidity while producing dividend income for investors.
Capital appreciation is the primary focus of most money market funds. However, in a recession, the value will plummet. The volatility in some asset types (like stocks) can increase or decrease your returns in the short-term. Plus, you can also shift your funds across asset types. However, since these funds are a mix of different investment types, a money market fund helps to balance the volatility risks across all categories.
Contact Riegelwood FCU Today
How do money market funds differ from bank accounts and money market accounts? We’ve explored the differences across all three options. Riegelwood Federal Credit Union is your choice for great savings and investment vehicles. We invite you to contact us to help you grow wealth for you and your family in the future.