I’ve been moving large sums of money between my bank accounts recently. I’m shuffling funds from my business account to my personal account to my high-yield savings account in an attempt to get each dollar in its proper place. It’s really not as complicated as I make it seem, though it does take a little work.

At one point during this process, I ended up with over $25,000 in my credit-union checking account. Most of this money is destined for future quarterly tax payments for my business, but until those payments are due, I’ll have a large chunk of cash sitting around doing nothing.

I was making a deposit at the credit union when the teller asked, “Would you like to open a money market account?”

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“Uh, I don’t know,” I said. “I feel like I should know what that means, but I don’t.” I see the term money market account all the time, but it’s one of those things I’ve always ignored.

“Well, right now you’re only earning 0.10% on your money,” the teller said. “If you were to move it to our money market account, you’d earn 1.60%”

“1.60%? Sign me up!” I said. I knew my ING Direct account was yielding less than that.

So now I have yet another bank account. I’ve been trying to reduce the number of accounts I have — to simplify my financial life — but instead they seem to be breeding like rabbits.

Later, I decided it was time to research money market accounts, to dispel my ignorance. According to the money market accounts primer at Money Rates:

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.

What are the practical differences between a money market account and a savings account? As far as I can tell, there aren’t many.

  • Money market accounts require higher minimum balances than savings accounts. My credit union requires a $10,000 minimum deposit on a money market account, for example. Their minimum deposit for a savings account is $5.
  • Some money market accounts allow limited check-writing privileges. My credit union doesn’t offer checks.
  • Money market accounts limit the number of withdrawals per month. I think I’m limited to four withdrawals at the credit union.

Because of these restrictions, banks have more discretion to use the funds in your account and depositors receive higher interest rates. Still, there’s not a lot of difference between savings accounts and money market accounts. In fact, many of the high-yield savings accounts I’ve mentioned in the past are actually money-market accounts.

To my mind — and I may be wrong here — a money-market account is like an intermediate stage between a savings account and certificate of deposit. It’s less liquid than a savings account, but moreso than a CD.

Finally, it’s important to note that there’s a difference between money market accounts and money market funds. Again from Money Rates:

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.

In the end, I’m not sure it’s important for the average person to use the mental energy to differentiate between money market accounts and other accounts. As long as you search for the best interest rates for your particular needs, you should be fine, regardless of whether your use a savings account or a money market account.

As for my problem with having “too many accounts” — I balanced things out a bit yesterday. I closed the household emergency fund that Kris and I had maintained since moving here five years ago. She had insisted upon that account because I was bad with money. That’s not an issue anymore!

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