What Is a Money Market Account
Beyond Just Saving – Where You Save Matters
We all know the usual advice about saving money: try to stash away as much as you can, whenever you can. And that's great advice! But once you’ve committed to putting money aside, a critical question follows: where should you put it? The right place can make a real difference in how your savings grow over time and how safe they remain.
You've probably heard the phrase "money market" when people talk about saving. It can be a little confusing, though, because "money market" can actually refer to two different kinds of financial products: money market accounts and money market funds. Confusing the two is a common mistake that could impact your financial security and growth potential.
To make the right choice, it's essential to unpack the fundamental differences between them. Understanding their unique characteristics, benefits, and considerations will empower you to select the option that best aligns with your specific savings goals.
Money Market Accounts (MMAs): Your Federally Insured Deposit Option
A money market account (MMA) is a type of high-yield deposit account offered by banks and credit unions. Think of it as a supercharged savings account, designed to offer a better return on your cash without sacrificing security.
Earning Interest
One of the primary draws of an MMA is its interest rate. They generally offer higher interest rates than standard checking or traditional savings accounts, allowing your money to work harder for you while it sits, while still providing easy access if needed.
Federal Insurance: Your Money Is Protected!
This is the most critical feature of an MMA. Your deposits are federally insured—by the FDIC (Federal Deposit Insurance Corporation) at banks or the NCUA (National Credit Union Administration) at credit unions—up to the maximum legal limit (currently $250,000 per depositor, per institution). This insurance means your principal is protected, providing an exceptionally high level of security.
Access and Liquidity
Money market accounts generally offer easy access to your funds. You can often make withdrawals, transfer money, or even write checks directly from the account. However, it’s common for MMAs to have limitations on the number of certain transactions you can make per statement cycle, typically around six per month. This helps keep them focused on savings rather than daily spending.
Minimum Requirements
Some money market accounts might ask you to have a higher minimum balance to open the account or to get the best interest rates. And sometimes, there could be fees if your balance dips too low. So, it's always smart to check these details when you're picking an account.
Ideal Use Cases for Money Market Accounts
Money market accounts are a fantastic choice for a few different money situations:
Emergency Funds: The combination of security and accessibility makes them perfect for your 3-6 month emergency savings.
Short-Term Savings Goals: Saving for a down payment on a home, a new car, or a big vacation in the next 1-3 years? An MMA keeps your money safe while providing a competitive return.
Accessible Cash Holdings: A place to park a large sum of cash that you need to keep liquid but want to earn more interest on than a standard savings account.
Money Market Funds (MMFs): An Investment Vehicle
Despite their similar names, a money market fund (MMF) is actually quite different from a money market account. It is a type of low-risk mutual fund that invests in short-term, high-quality debt securities, such as government Treasury bills, certificates of deposit (CDs), and commercial paper.
Investment Product
An MMF is an investment product, not a deposit account. You purchase shares in the fund, typically through a brokerage firm or mutual fund company. The fund's goal is to maintain a stable share price (often $1.00 per share) while paying out interest in the form of dividends. Because money market funds are investment products, they are typically offered by brokerage firms or mutual fund companies, rather than traditional banks or credit unions.
No Federal Insurance: An Important Distinction
This is the single most important distinction: Money market funds are not federally insured by the FDIC or NCUA. While they are considered one of the lowest-risk investment options because they invest in high-quality, short-term debt, their value can fluctuate. There is a minimal, but real, risk of losing principal, especially during times of severe market stress. This is known as "breaking the buck," when the share price falls below $1.00.
Interest and Yield
MMFs aim to generate a higher return, or yield, for investors. Their yields are closely tied to short-term market interest rates, so they can be very competitive, sometimes offering higher returns than MMAs. Their rates usually go up and down along with broader market interest rates, so they can change based on the economy.
Liquidity
MMFs are also highly liquid. You can typically sell your shares and access your cash within a few business days. The process is part of an investment transaction, however, and not as simple as a bank withdrawal.
Ideal Use Cases for Money Market Funds
MMFs can be useful for a number of saving situations, as long as you keep their important considerations in mind:
Short-Term Investment Holdings: A place to hold cash within a brokerage account before you decide on a longer-term investment.
Diversified Portfolio Component: Holding a portion of a larger investment portfolio in an MMF can add stability.
Higher Yield Seekers: For individuals comfortable with a very small amount of market risk in exchange for the potential of higher returns than those offered by MMAs.
Money Market Account vs. Money Market Fund
To recap, here are the most important differences to keep in mind:
Insurance: Money market accounts are federally insured (FDIC/NCUA), providing a high level of safety. Money Market Funds are not federally insured, carrying a very slight investment risk.
Product Type: An MMA is a bank deposit account, similar to a savings account. An MMF is an investment fund.
Risk Profile: MMAs have extremely low risk due to federal insurance. MMFs are considered very low risk investments, but they still carry a minimal level of market risk.
Access/Liquidity: MMAs usually have some limits on monthly transactions. MMFs are generally flexible, but their redemption process is based on investment procedures.
Provider: MMAs are available at banks and credit unions. MMFs are typically offered by brokerage firms and mutual fund companies.
Aligning Your Choice with Your Savings Goals
It’s important to understand that neither money market accounts nor money market funds are a perfect fit for every single savings objective. The right choice depends on your financial goals.
For Short-Term Goals
For emergency funds or other short-term goals like a down payment, money market accounts are an excellent choice. Their federal insurance provides security, and their accessibility makes them ideal for funds you might need quickly.
For Long-Term Goals like Retirement
The interest or yield earned on both MMAs and MMFs will likely not grow fast enough to keep pace with inflation over many years. Since inflation can slowly reduce your money's buying power over time, you’ll want to consider investments that offer higher growth potential, even if they come with a higher level of risk. Designated retirement accounts like IRAs and 401(k)s are a good place to start.
Factors to Consider When Choosing Between a Money Market Account and Money Market Fund
Your Comfort with Risk: How comfortable are you with any level of investment risk, even a very small one?
Time Horizon: When will you need access to the money?
Amount to Save: Do minimum balance or investment requirements fit your plans?
Fees and Charges: Be sure to understand any maintenance fees, transaction limits, or investment-related fees (like expense ratios) that might apply.
Making Your Informed Choice and Seeking Guidance
Ultimately, the best place for your savings will depend on your unique money situation. This includes your specific savings goals, how comfortable you are with risk, and how quickly you might need to get to your money.
If you’re still unsure, don’t hesitate to seek personalized advice. A financial advisor can be a great resource, or feel free to stop by to talk to one of our financial services reps. They can help you review your financial situation, clarify your options, and tailor a solution that ensures you make the best possible choice for your hard-earned savings.
Get Started With a Fidelity Bank Money Market Account Today
Fidelity Bank makes it simple to open a Money Marketing account online in minutes. We offer tiered interest and a minimum balance of $1000. Terms apply. Open here now!