Now that we have a solid base to move to, let us look at the different types of accounts which we can put our earned money into. A money market account differs from a traditional savings account or a certificate of deposit (CD) in certain fundamental and important ways. They offer certain advantages that certain individuals may wish to take advantage of, but understanding their peculiarities is an important first step. During this period of extreme economic uncertainty, securing additional yield is important wherever possible, and a money market account is one such option.
In the U.S., the money market describes the market for investments with maturities under one year. This market includes treasury bills (T-Bills), corporate paper, overnight repurchase agreements (repos), and Eurodollars. Each of these instruments matures in less than a year and are considered highly liquid. The return they offer, which must be compounded over the course of the year (the capital must usually be invested multiple times to achieve this rate), is slightly higher than the rate offered in a traditional savings account. In most cases, an individual has a number of choices of what type of money market fund they wish to invest their money in as the underlying investment of the account. These funds manage the aggregate cash position as a pool which allows the manager to account for regularly changing cash needs of the various participants.
Other features that are common to money market accounts include the ability to change easily from one type of money market fund to another, minimum balance requirements, and the ability to write a limited number of checks from the account each month. As with most mutual funds, most money market accounts allow the account owner to make adjustments to the investment fund on a daily basis. These accounts usually require a minimum balance of $500 or more – these requirements may differ in cases where the account owner sets up monthly direct deposits into the account. Furthermore, in most cases, the account owner can write up to two checks per month out of the account at no additional fee – in this respect, a money market account is different from a traditional saving account which rarely has check writing ability and pays lower rates of return.
Money market accounts differ from a CD in that CDs have minimum investment periods before which large penalties are assessed. This allows for smaller denominations because the bank knows that the capital will remain in place until a specified date; for this reason, CDs tend to pay slightly higher rates than money market accounts. While all three options have advantages, a money market account provides a good blend between flexibility and return.
Compounding Cents 