For a solid investment, look to money market accounts
If you have a large amount of money in savings, putting that cash into a money market account can significantly increase your earnings. Here's why a solid investment portfolio should include a money market account.
Why a money market account
A money market account is a deposit account. It's similar to a savings account, but a good money market account will typically offer higher interest rates than most savings accounts, typically in exchange for certain minimum balance requirements to open and maintain the account.
For instance, a money market account might require a minimum of several thousand dollars to open, and a minimum balance of $1,000 to avoid fees.
How money market accounts stack up against alternatives
Though money market accounts and savings accounts are closely related, there are some fundamental differences that can make a money market account a far better choice for some.
Savings accounts tend to offer more liquidity by allowing easier and quicker access to your money, but they generally yield a lower interest rate in return. Some money market accounts might restrict your access compared to other accounts -- perhaps you will be limited to a small number of transactions per month -- but money market rates are often worth the trade-off to investors.
Certificates of deposit, also known as CDs, can have higher interest rates than money market rates, but they have many more restrictions than money market accounts. Money invested in a CD remains tied up for a specified period of time before the account matures. If you need to withdraw money during that locked-up period, you ware likely to lose a chunk of your accrued interest.
Finally, it is important to remember that all three options -- savings accounts, certificates of deposit or money market accounts -- are FDIC insured up to $250,000 per account.
How to choose the best money market accounts
Start by comparing high-yield money market accounts. Oftentimes the highest money market rates will catch your attention, but remember, there are other criteria to consider. You should also take into account:
- Minimum amount required to open
- Minimum balance required
- Number of transactions allowed per month
- Any fees applied
Some money market accounts will offer terms that you can meet easily, given your current banking patterns. For instance, if you can only conduct six free transactions per month with a money market account and you think you'll only use it to deposit your paycheck and pay your mortgage, you won't find the transaction limit very challenging. Narrow down your selection to those money market accounts with restrictions that won't cramp your banking style.
Next, look for the highest money market rates. It's often easy at this point to identify the account that best suits your needs.
Critical difference between "funds" and "accounts"
Keep in mind that money market accounts and money market funds are not the same. Money market funds are investments in the debt market, which are not backed by FDIC insurance -- and the money can't be readily accessed if you can't sell the funds right away. A money market account is an interest-bearing savings vehicle with almost immediate access, so you don't take virtually any market risks up to the FDIC insurance limits.