Advantages & Disadvantages of Money Market Accounts

by Kevin Johnston

You can park your money in a money market account at most banks and with online stock-trading sites. These accounts pay higher interest than a savings account, while offering many of the features of a checking account. You can reap the benefits of a money market account and minimize the disadvantages if you understand how a money market account can work in your investment strategy.

Interest

The interest you earn in a money market account won't make you rich, but it beats the rate you get on a savings account at a bank. This feature makes a money market account a good place to park money for short-term savings or just while looking for a better place to put it for the long haul.

Minimums

Most money market accounts require a minimum balance of $500 to $1,000. If you maintain this minimum balance, you will pay no fees. In practice, that means you can't touch the money that you keep in the account to meet the minimum, so you'll need additional money if you want to be able to withdraw some whenever you need it.

Sweep Feature

If you open a money market account with an online brokerage, you can elect to keep all of your cash in a money market account. The company "sweeps" all cash (such as dividend payments) out of your investment account each night and places it in a money market account to earn interest. Then when you are ready to buy a stock, it sweeps the money out of the money market account to purchase the investment you choose.

Check Writing

You can write checks on your money market account. That doesn't make this type of account good for daily expenses, however, because most institutions limit you to as few as three checks per month. The best way to use this feature is to write a check to your checking account to cover your expenses for a week to 10 days. The rest of your money will continue to earn interest.

Insurance

You have the protection of FDIC (Federal Deposit Insurance Corporation) insurance on a money market account. You have insured up to $250,000. These accounts qualify for insurance because the money you invest goes into banks, which themselves are insured by the FDIC.

Liquidity

You can withdraw money from a money market account at any time. If interest rates drop and you prefer to pull all your money out of a money market account and put it somewhere else, you can do so with no penalty. Some banks even allow you to withdraw cash from money market accounts at an ATM.

Accounts vs. Funds

A money market account differs from a money market fund. A bank holds a money market account and loans the money out to borrowers. A money market fund is not held by a bank, is not insured, and invests in short-term investments such as treasury bills. A money market fund typically pays higher interest rates than a money market account, but at slightly higher risk.

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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