Seeking Another Safe Haven: Money Market Accounts

Money market accounts and savings accounts are nearly identical,
except that money market accounts offer better interest
than a savings account. Money market accounts also offer
some check-writing privileges. In exchange for these benefits,
most institutions require a high minimum balance for
money market accounts, averaging between $500 and
$2,500.

Don’t confuse money market accounts with money market
funds. Both money market accounts and money market
funds are used to “park” cash and still maintain liquidity.
Money market funds, however, are a type of mutual fund. To
learn about money market funds, turn to Chapter 3.

Money market accounts, offered by banks, savings and loans,
and credit unions, are a good way to keep money that you
may need to get your hands on in a hurry. Money market
accounts earn more interest than you would with a savings
account without risking a loss in value (which could be the
case if you put the same money into stocks and had to turn
them into cash quickly). For medium-term expenses, such as
saving for a down payment on a car or furniture, a money
market account can be a good choice. Money market
accounts can also be a good place to put the three months’
salary that you set aside for emergencies.

Money market accounts function like a checking account in
that you can write a minimum number of checks (usually
three) on the account each month. However, in some cases,
money market account holders are allowed to make unlimited
free deposits and withdrawals from ATMs in their
network.


If you only write a
couple of checks a
month, a
money market
account might be worth considering. But usually a hefty
fee ($10 to $20) is charged if an account holder writes more
than the number of checks permitted. Any additional interest
a money market account allows you to earn will quickly
be chewed up if you have to pay for extra checks.
Some people use a
non-interest-bearing checking account for
paying regular bills, and then keep their larger reserve in a
money market account to gain a higher rate of return. In fact,
some financial institutions offer to link a money market
account with a checking account, so if your regular checking
account doesn’t have sufficient funds to cover a check, the
institution automatically transfers money from the money
market account to the checking account.

Interest rates for money market accounts vary widely and
depend on the amount you deposit. When money market
accounts were created in 1982, people could earn 10% or
more interest on them. During the next 10 years, interest
rates for money market accounts bobbed up and down but
never got back to the early rates.

When you open an account, you get the prevailing interest
rate as set by the bank. Most banks change the rate once a
week — every Monday morning, for example — and they
give you a phone number to call to check the rate. Your rate
may improve if you deposit more funds, but often you have
to reach a threshold of $15,000 or $30,000 to see a significant
increase in your rate.