Money market accounts are similar to regular savings or retirement accounts, except they have slightly higher rates of interest and shorter term investments. Banks offer these now by some names such as rewards credit card account, high balance investment account, business banking account, etc.
Typically, this type of account comes with monthly direct deposit in your account, free access to computer and mobile apps to monitor your money, and sometimes small cash back prizes for things you do with the account.
This article will discuss why having an easy way to access your funds is important, what types of money market accounts exist, and how to choose the best one for you. But first, let’s look at some basics about investing.
Investing: The Basics
Many people start investing when they come into money, but most give up soon after because it can be tricky to understand. It takes time to learn what types of investments are worth looking into, and which are not.
That is why there are professionals that handle all of your investing needs. A person who specializes in investing may help you decide if a money market fund is right for you. They could also manage the fund for you, depending on whether you want to do that yourself.
Here are some basic terms related to investing:
Retirement: This is when someone saves enough money so that they do not need to work anymore.
- 1 Types of money market accounts
- 2 How a money market account works
- 3 Advantages of a money market account
- 4 Disadvantages of a money market account
- 5 Who should open a money market account
- 6 What interest rates are available in a money market account?
- 7 How to open a money market account
- 8 What will I receive?
Types of money market accounts
There are several types of quick access savings accounts that work similarly, but have different names depending on what level of risk you want to take. Some offer slightly better returns than others, but all make it easy to spend directly from the account!
The best ones allow you to deposit any amount, and let you pull out up to $1,000 per day – no minimum balance needed. This is great if you need some extra spending money immediately or if you like to do daily shopping.
You can also transfer money into the account form another source, such as a checking or savings account. This is helpful in cases where you don’t have enough for a large withdrawal, or you would prefer not to carry around too much cash.
Money market fund accounts
These instead contain money from many people who deposited it before you. This way, the bank gets paid back with interest for giving everyone access to their money, while still offering strong security.
How a money market account works
A money market fund is an investment vehicle that has something called as shares. Just like how most major corporations have stock, money market funds also have shares. These are not ordinary stocks, however.
Money market funds do not pay dividends or distribute profits to shareholders. Their main purpose is to increase your wealth by growing very quickly. This is done through what is referred to as capital appreciation.
Capital appreciation happens when the value of a company’s stock goes up. Because the stock in a money market fund is owned by lots of different people, it becomes more valuable due to its rising price.
That being said, there are still good reasons to consider investing in money market accounts. For example, if you need a quick infusion of cash, then a money market fund may be your best bet.
A nice feature of these types of investments is that they typically offer higher interest rates than normal savings accounts. Money market fund owners earn above-the-line distributions just like any other shareholder, with one exception — there is no share dividend!
Needed: Read our article about why it is important to understand basic finance terms before buying anything.
Advantages of a money market account
A money market fund is an investment vehicle that was first introduced in 1989. Since then, they have been one of the most popular types of funds for good reason!
A money market fund does not carry any debt or obligations. This means there are no longer limits to how much money you can put into it. It also means there are no monthly fees for using the fund’s services.
Another advantage of a money market fund is their guaranteed liquidity. This means you will never need to find other ways to get your money back because the fund itself has enough liquid assets to do so.
As with any investment, there is the risk of losing money due to poor performance of the stock. But since a money market fund doesn’t hold long-term securities, this risk is mitigated. Instead, the stocks held in the fund are short term, easily convertible instruments such as US Treasury bills.
Disadvantages of a money market account
A money market fund is not as well known as regular stock or bond investing, but they are quite popular. They have some important differences from normal investment accounts that make them less desirable than other types of funds.
Money market funds do offer higher yields (returns) than traditional investments like stocks or bonds, which can be attractive if you need to spend your income quickly.
However, there are two major disadvantages to owning a money market fund instead of individual securities. First, it’s much easier to lose money buying a single security rather than an entire portfolio. Second, it’s harder to get your money out once it is in a money market fund.
Both of these effects reduce the average investor’s chance of successfully withdrawing their money. It also increases the risk of loss for people who invest in money markets because it may take longer to realize a large profit.
Who should open a money market account
If you are an active person with busy schedules, then having a savings account is not a good idea. It can be difficult to maintain long-term goals such as saving for a house or retirement due to time constraints.
A money market account (MMA) allows you to keep your funds untouched until you are ready to use them. This helps you save longer since you don’t have to think about taking every opportunity to put away some of your income.
You will enjoy several advantages by opening an MMA account. Here are some reasons why you should consider one:
* You can earn more returns
Money in the form of interest is always better than no return at all! As we mentioned before, part of your earnings goes towards growing your wealth, which is definitely a worthy goal.
There are two main types of money market accounts – short term and long term. Short term money markets usually offer higher APYs (annual percentage yields), but this may not last.
As you probably know, there are many ways to earn extra money online. Try switching up how you spend your money to gain more from investing. Long term investment options include CD’s and ETFs/mutliple asset classes.
* Protection against losses
In a money market fund, your capital is protected in case the manager fails. A majority of these managers have enough resources to cover their responsibilities, so protection is given to investors.
What interest rates are available in a money market account?
Most banks offer an easy way to manage your spending through their savings accounts. A “money market fund” is typically a collection of very short-term, low-interest investment securities such as Treasury bills and bonds.
Money market funds usually have much higher average APYs (annual percentage yields) than normal savings accounts. For example, say you needed $1,000 for a major purchase this month. An AMFI Money Fund Investor Shares Savings Account would give you access to a $1,000 cash injection with a monthly fee of $10.
A money market fund, by comparison, might be paying only 0.
How to open a money market account
Now that you know what a money market fund is, it’s time to learn how to invest in one!
Money market funds are very common these days. Most people have at least one investment in their money market fund accounts. Some people may even have several different ones depending on their investing goals.
It’s totally okay to add more to your collection!
But before you do, make sure you understand why having an investment in a money market fund is smart.
What will I receive?
Money market accounts offer you several different levels of investing services, but what they all have in common is that they are considered short-term investments. This means that these accounts do not require you to hold onto your investment for longer than one year!
A money market fund is an excellent way to invest in business growth. These funds typically invest in various types of debt instruments (debt securities), such as loans or bills owed by businesses. The debt securities are then gathered together into groups to make up the money used to pay off the loan(s) represented by each security.
By investing in money market accounts, you can earn higher returns through dividends paid out by the companies that own the debts. Dividends are like earnings that corporations distribute to shareholders proportionally to their stock ownership.
These high interest rates come from people who borrow money for this account. Because it does not take too long to spend the money, there is no need to use the proceeds for anything else except investing.