What Are Money Market Accounts?

The most important thing to know about a money market account is that it is most similar to a savings account. Money market accounts can seem to occupy a gray area because they have a name similar to money market funds, but they are most closely related to savings accounts.

Similarities and Differences between Money Market Accounts and Savings Accounts

Because the federal government considers money market accounts a subset of savings accounts, the two investment options share many important characteristics:

  • Stability of principal. Your balance will not be subject to fluctuations in value
  • FDIC insurance (within coverage limits). To protect your deposit, make sure your bank participates in the Federal Deposit Insurance Corporation (FDIC) insurance program
  • A variable interest rate. Like all short-term interest rates, money market account rates will tend to be relatively low, and subject to continual change
  • No set length of deposit. Unlike a certificate of deposit (CD), a money market account will not lock up your money for a set period of time
  • Monthly transactions limits. By law, transfers out of money market accounts are limited to six per month (or similar statement period). Furthermore, only three of those outgoing transfers can be to third parties. Individual banks may also impose additional restrictions

The term "money market" refers to the short-term income securities a bank may invest in as a means of funding the interest for its money market accounts. In contrast, savings account interest is funded by the general business activities of the bank.

Due to the investment commitments the bank is making to fund money market interest rates, banks may place certain restrictions on money market accounts. These restrictions may include higher minimum account balances, or stringent transfer limitations. However, these policies will vary from bank to bank.

Market conditions dictate whether the differing investment approaches, between money market accounts and savings accounts, will result in a higher interest rate. Also, it is important to compare interest rates on savings accounts and money market accounts in light of any additional restrictions money market accounts may place on your money.

Similarities and Differences between Money Market Accounts and Money Market Funds

Money market accounts and money market funds may be backed by similar investments, but the similarity ends there. Money market funds are mutual funds and they are subject to the fluctuations in the value of their underlying investments. Money market funds are also subject to management fees, which will typically reduce their interest rates. Finally--and crucially-- money market funds are not backed by FDIC insurance.

This Guide to Money answer includes the topics: Save, Money market accounts.

Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

 
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