Thursday, January 29, 2009

So What Are Market Money Accounts?

Money market accounts are accounts you open with a bank, where you deposit your money and it collects interest until you want to use it. You typically have a limited number of transactions allowed per month. It is an extremely safe investment because up to $100,000 ($250,000 until the end of 2009) is insured by the FDIC. This sounds like a savings account doesn’t it? They are actually very similar; money market accounts are sometimes even known as high interest savings accounts. So what is the difference? Why does a money market account earn a higher interest rate?

When you open a savings account, you are allowing your money to be loaned out by the bank. When you open a money market account, you are giving your money to the bank to invest in the money market. To put it simply, the money market is a place where CDs and treasury bills, among several other things, are traded. You don’t own anything the bank is trading. It’s not like you can claim a particular treasury bill that the bank bought without your money. The money from your account is pooled with the money from all the other money market accounts open in that back. However, this is just background information. None of this really impacts your investment because the bank deals with all of the trading and just pays you interest for using your money.

Money market accounts can have higher minimum balances to start an account. They can also require that you keep more money in the account unless you want to incur a penalty. Look around at different banks to find one that fits your needs though, because not all banks have the same requirements. Most banks though, do offer higher interest rates to accounts that have more money in them. Here is a chart showing the difference between average rates for money market accounts and rates for money market accounts with at least $50,000

Graph from

While it may seem risky that you are trading in a market like this, it is not at all. The bank is is the one making the trade, taking the risk and getting any profits. You are getting your guaranteed interest regardless of how poorly or well the bank does. 

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