Six common mistakes made with money market accounts
November 22, 2010
Money market accounts can be a valuable banking tool for savers. Too often though, they are misunderstood or just not recognized as a potential option.
To help you make better use of money market accounts, here are some things you should know about six common mistakes made with money market accounts:
- Overlooking money market accounts. It's fair to say that most banking customers are more familiar with the concepts of checking accounts, savings accounts, and CDs than they are with money market accounts. Money market accounts are similar to savings accounts -- they can actually be considered a subset of savings accounts -- but they typically offer higher interest rates. In fact, according to FDIC figures, average money market rates are on par with 3-month CD rates, so money market accounts can be seen as a less restrictive alternative to short-term CDs.
- Confusing money market funds and money market accounts. Money market funds are probably more widely-known than money market accounts, and they derive their names from the fact that they can be funded by the same types of underlying investments. The similarity ends there, however. Money market funds are mutual funds where your money is mixed with that of other investors, whereas money market accounts are separate accounts in which each customer's money is kept separate. Money market funds are offered by brokers, and carry the possibility of a decline in principal value. Money market accounts are offered by banks, and therefore your principal is protected by FDIC insurance, up to the $250,000 limit.
- Not shopping for money market rates. Deciding to switch to a money market account is the first step, but not just any account will do. Money market rates vary greatly from one bank to another, so do some shopping around to get the best rate you can find.
- Overrating teaser rates. Teaser rates are special rate offers that apply for a limited period of time. You should choose your money market account more on the basis of what the ongoing rate would be.
- Not understanding account restrictions. Money market accounts may be a subset of savings accounts, but they typically carry some additional restrictions. These may include requiring you to maintain a higher minimum balance, and/or limiting the number of times per month you can access money in the account. Basically, banks want balances in money market accounts to be more stable, which gives banks more latitude as to how they invest the money, which is why they can offer higher interest rates. If you need an account you can access frequently, a money market account is probably not for you.
- Not tracking changes in money market rates. Unlike a CD, a money market account does not set a rate and lock it in. Money market rates on your account will vary over time, as will rates on money market accounts at other banks. You need to periodically check money market rates to make sure your bank is still competitive.
If you get to know a money market account, and avoid the above mistakes in the process, you could find a few extra dollars in your bank balance at the end of the year.