Money Market Accounts
Friday, January 18th, 2008It is now the time to demystify the perplexing world of money market accounts. Many people who are not familiar with different types of investment vehicles may become confused when they hear the term money market used. That is easy to understand if you break down the name of the investment. The term “money market” sounds like one is investing money in the market. When people think of the market they naturally assume the stock market. They know that in the stock market it is possible to lose your money. So why on earth being the conservative investor that they are, would they want to invest in some stock market fund that could lose them money?
The truth is that a money market account has absolutely nothing to do with the stock market, mutual funds, index funds or anything else similar. The money market account is a special type of savings account. Typically a financial institution will require a minimum amount of funds to open a money market account. At Washington Mutual (WM) for example you will need $2,500 to open a money market account. Typically as your money market balances increase, your interest earned will increase as well.
Here is an example of the current money market rates at Washington Mutual. You will notice that as the balances increase, the interest earned will increase as well.
| Balance Tiers | Guaranteed Minimum |
Standard |
|
|---|---|---|---|
| $0 - $4,999 | 0.15% | 0.10% | 0.12% |
| 1.00% | 0.75% | 0.84% | |
| $10,000 - $24,999 | 1.79% | 1.49% | 1.60% |
| 1.79% | 1.49% | 1.60% | |
| $50,000 - $99,999 | 1.79% | 1.49% | 1.60% |
| 1.79% | 1.49% | 1.60% | |
| $500,000+ | 1.79% | 1.49% | 1.60% |
The banks and credit unions will take the money that is invested in the money market accounts and invest in Treasury Bills, CDs, Commercial Paper, and other very safe investment instruments. Obviously a Treasury Bill is earning more that 1.60% APY, but one must also consider that the financial institution is the one making the investments. The spread between the actual rate and the rate the depositor receives could be considered a “hidden” convenience fee levied by the financial institution (hey, they need to make money too!).
So in short, a money market account is a glorified savings account in which the depositor can earn a higher interest rate. Another great thing about a money market account is that it is FDIC insured up to $100,000. This means that if your financial institution goes under you will get all of your money (up to $100,00) back, including those funds that you have in the money market account.
Pros of the money market account: 1.) You can earn a higher interest rate. 2.) Your funds are FDIC insured up to $100,000 3.) Does not require the funds to be in the account for a certain amount of time.
Cons of the money market account: 1.) Typically does not have as high of returns as a Certificate of Deposit. 2.) The account is typically limited to 6 transactions per month in accordance with Regulation D. 3.) Generally requires a larger minimum balance than a savings account.
So there you have it. A money market account can be a great way to start accumulating some extra savings. This type of account is especially useful for someone who wants to earn a higher return than a savings account, but does not want to have their funds locked up in a CD.
As a final note, the author currently has a July 2008 $10 put on Washington Mutual.