Considering the current economic instability and the lack of faith of the common man in the financial system, it is obvious that today, the financial sentiment is tilting more towards the safety of funds than to the higher yields or returns.
The common man is looking less and less at the return on investment figures, and looking more and more at parameters, like minimum balance requirement, safety of funds and liquidity, etc.
Yet, not all are same and not everyone has the same requirements, and hence, the need to know the differences. Here's the low down on the money market accounts and savings accounts, just to help you choose the best one for yourself considering your unique needs and preferences.
Money Market Accounts
These bank accounts are not really very different from normal bank accounts for savings. They are bank accounts that give relatively higher rates of interest (in real terms), and require larger minimum balances to support this 'high interest rate' facility. They are alternately known as money market demand accounts or money market deposit accounts (MMDA).
This is an account, with a bank or financial institution that primarily looks for principal security and provides modest interest rates. These accounts are considered as the most liquid instruments, right after demand accounts and actual cash. Their only drawback is that they usually pay lesser interest rates than Treasury bills and certificate of deposits.
Comparison Between the Two Accounts
Both the accounts differ in their special characteristics in the following aspects.
■ While a money market account is a longer term, less liquid investment option, savings accounts are generally shorter term and more liquid. This is so, as the meager interest rates given on the latter make them imprudent long term investments and the higher interest rates on the former lure the investors in sticking with the investment for longer duration.
■ Most of the MMAs require very high minimum balances, and this is done to enable the institution to invest in investments that can help it keep up with the promised yield. The savings accounton the other hand, is fairly easy to start, and it requires lesser minimum balance amounts.
The minimum balance criteria offers greater withdrawal facility (and hence the higher liquidity) than the other account (one has to maintain the balance, and cannot withdraw a lot if one is to earn the higher interest income).
■ MMDAs usually have a limit on withdrawals, which is far stricter than savings account withdrawals limits. Depending on the type of savings account, there are impositions of fees made on checks and withdrawals, limits on the number of transfers or transactions that take place per month. Despite this, these accounts are still more liquid than MMAs.
■ Savings accounts give the investors the advantages of no or low minimum amounts to open the account, easy access to money invested, online banking flexibility, safety of balances invested, etc. MMAs offer high interest rates to help your investment grow, higher minimum balances (ensuring that you save and don't withdraw and spend) and safety of investment.
As both accounts are insured by the FDIC (Federal Deposit Insurance Corporation), both accounts give safety of investment, up to $250, 000.
■ Last but not the least, as money market accounts are not meant as high transaction accounts, they give the indirect advantage of larger amounts actually being saved by the investor.
The savings one is topped with the advantage of higher interest rates, and thus growth of funds. However, they are necessary as accounts to safe money for routine expenses, where money stays safe and is always available to you, even though it may not grow at impressive rates.
Now that you know all the details of the comparison, you should be able to choose wisely according to your preferences. Yet, there is one more account that you should know of when making such a decision. Have a look at it and its advantages and disadvantages as well, to make an even better, informed decision concerning your personal finances.
Money Market Mutual Fund
Money market mutual funds are open-ended funds that invest only in money markets, and hence are quite liquid themselves. Also known as money funds or money market funds, their main goal is the preservation of principal providing liquidity. They do earn modest dividends on the investment, but it is hardly noteworthy.
Though they are not FDIC insured like the two accounts mentioned in the earlier paragraphs, the risk they carry is quite low, and doesn't require cover on most occasions. The biggest risk this fund faces is that its return may not cover the inflation erosion over time.
It has three biggest advantages - liquidity and safety, easy trade between money market funds of the same institution, and extra percentage or two of extra returns over other investments (due to their use as cash management tools by brokerage firms).
It is your money, so decide what you want to do with it only after researching on given three fairly liquid methods of investment. The decision depends solely on your priorities, i.e., whether you wish for liquidity, higher return, or principal safety. Invest wisely for yourself as well as the economy.
Disclaimer: The mentioned details are for reference purposes only and do not directly recommend any specific financial course of action.