Money Market Accounts Primer

Money market accounts are similar to savings accounts, but often pay higher interest and may carry certain restrictions, such as a minimum balance or a limited number of transactions allowed per month. The goal for the account holder is to receive more interest with less risk. These accounts are historically favored by conservative investors who seek a guaranteed return on their money. They are the "boring" part of many a balanced investment portfolio.

Safety

In today's financial markets, safety is the number one advantage of a money market account. Insured by the FDIC, backed by the full faith and credit of the United States Treasury (up to a limit of $250,000), a money market account is as safe and sober as financial products come.

It's basically a savings account, with a little higher interest rate and some ability to write checks or take ATM withdrawals out of the account. Nothing fancy, but eminently solid. Not one person has lost money in an FDIC-insured account since the agency was created, in 1933.

Indeed, money market accounts are a perennial favorite among people who take a skeptical view of more dynamic but riskier investments such as stocks. A money market account is perfect for someone who wants to preserve capital, rather than grow it rapidly (and perhaps lose it rapidly).

It's boring, and that's a good thing. When the stock market is plunging down and then spiking up, plunging down and then spiking up, money market account holders sleep peacefully, knowing their money is safe.

Higher Interest + Easy Access

Even people who don't like excessive excitement want a return on their investment. By and large, money market accounts pay a higher rate of interest than most regular savings accounts. Especially if you maintain a high balance, money market interest rates are consistently among the best in the business.

With a money market account, however, you don't have to leave your money in for any longer than you want to, and there's no penalty if you take it out. These accounts are liquid. You can move money in and out of them. Many banks will even give you an ATM card to do exactly that. Depending on the bank, you can write up to six checks per month out of the account.

Again, this may not seem like that big of an advantage--until you compare the liquidity of a money market account with the liquidity of the other places to put your money. Real estate, for example, may be appreciating, but that doesn't mean you can cash out tomorrow.

All in all, this kind of account is a strong option for people who want to keep their money working for them and safe at the same time.

Please Note: NOT the Same as Money Market Funds

These accounts should not be confused with money market funds, but often are. Money market funds are more like mutual funds. They are an investment in the debt market. They are not backed by FDIC insurance and you cannot withdraw your money as easily.

Money market accounts are much more like savings accounts. The money sits there, gathering interest, and the owner of the account can pull it out at any time.