What's The Difference Between Money Market Accounts And Money Market Funds?
This year, many investors learned the hard way the difference between a money market account and a money market fund. Do you know the difference?
A money market account is a type of deposit account. Much like its siblings, the checking and savings account, a money market account is FDIC insured, your principal is guaranteed, and you open one at a regular bank. It's like a hybrid checking and savings account because it earns interest like a savings account but you can write checks against it, often three to six times a month. You can withdraw your money whenever you like and the interest rate can change at any time.
A money market fund is a mutual fund. It is not FDIC insured, your principal is not guaranteed, and it is a security, you buy it through a broker. Technically, it's just like any other mutual fund. What makes a mutual fund a money market fund is what it invests in. Money market funds invest in supposedly "safe" investments like bonds and short term commercial paper, also known as "the money market."
For the longest time, everyone assumed that money market funds would never "break the buck," which is when the share price fall under $1 a share. That assumption was never tested until this year. When Lehman Brothers failed, its bonds failed and money market funds holding these assets lost a tremendous amount of money. The government eventually stepped in and prevented them from falling under $1/share but they didn't have to; a money market fund is an investment and investments are risky.
With online banks offering extremely high interest rates, the speed and simplicity of ACH transfers, and 6% APY reward checking accounts, I don't know why money market accounts still exist. Money market funds, on the other hand, still have value because you can find tax-exempt or tax-advantaged funds. They are especially appealing in a higher tax bracket because the tax equivalent yield can often beat other "safe" investments.
Jim writes about personal finance at Blueprint for Financial Prosperity.
(Photo: pfala)
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Thank you for posting this! I just started working at a bank in August, and every day we have panicked customers coming in accusing us of not insuring their money because they have it in a money market account, and OMG TEH NEWS IT SAID THEY AREN'T INSURED. One guy was so freaked out that he closed his account and took it elsewhere because he didn't believe that we weren't secretly putting his money into the stock market...
Money Market Accounts and Funds still exist because the 6% rewards checking accounts require you to jump through a lot of hoops to get that rate. If you do not meet every requirement your rate falls to less than 1%. Plus, most of these accounts limit the amount of money that earns that rate (generally $25k).
I get 5.01% through my campus federal credit union. Its AWESOME.
I've got a system down. I use a credit card for all my expenses through out the month. Then my interest is compounded in my checking account, and THEN I pay off the credit card in full. That way I get points/cash back, and I also get more interest on the money in my account because its just sitting there. It ends up being 6.01% average with the 1% cashback on the credit card.
"With online banks offering extremely high interest rates, the speed and simplicity of ACH transfers, and 6% APY reward checking accounts..."
Describes well how people in the UK saw Icelandic Banks.
And how'd that work out for ya???
A few comments and corrections:
Withdrawals from MMAs (of any type, including checks, ATM withdrawals, electronic transfer) are restricted by regulation to no more than 6 per month.
Frequency of withdrawals from MMFs are not limited by regulation.
Some MMFs allow check writing
MMFs can be purchased directly from mutual fund companies (such as Vanguard, Fidelity) as well as from brokers (such as E*trade, Schwab)
September 2008 is not the first time a MMF broke the buck, it happened in 1994
"The government eventually stepped and prevented them from falling under $1/share" is not quite right. The US Department of the Treasury initiated a "Temporary Guarantee Program for Money Market Fund" assets as of 19 September 2008, only if the MMF company opts into the program and pays a premium based on the total value of assets in the fund. The program explicitly excluded MMFs that broke the buck before 19 September 2008. The program expires in April 2009 See the Treasury press release: http://www.treas.gov/press/releases/hp1163.htm
They learnt this all -this- year? That's some fast learnin there, Lou!
@Coles_Law: I just checked bankrate and nobody even comes close to that rate. In addition, the higher rate ones are FAIL banks as judged by bankrate.com's starring system. I saw some real winners on the list, such as AIG bank, IndyMac, and GMAC Bank.
@nudger: I believe that Icelandic banks were pimped on this site once as a good idea:
Here's the story:
My bank sent me a letter telling me which accounts/funds were and weren't covered by the guarantee. Black & White, addressed to me.
Are you providing these people with written letters telling them which accounts are and are not covered by the deposit guarantee? If yes, then I agree these people are overreacting.
If there is no written confirmation available, I'd also tell you to pound sand and then take my money elsewhere. In this day and age, who would trust a bank teller or phone clerk on their verbal word?
@sonneillon: Did they 'lose' 30 trillion this year? Or are we talking about losing inflated 'oh i think its worth double what we paid' losses in 2008?
"Vanguard money market fund accounts"
Now let the fun begin!
Yes, they are indeed funds (I think), but Vanguard uses Fund, Account and Fund Accounts _interchangeably_ throughout their "Money Market Accounts" information page.
Likely just a case of the marketing department not being in sync with the lexicon, which is why I'm thankful for articles like this!
@seamer: It's the later, a sort of this is what the stock market is at this is what the stock market went to and this is how much wealth was removed from it. I like using the big number.
I get 5% in my checking account here. It was 6% two months ago but times are tough. Yes, there are still SOME banks handling there shit the right way and taking care of their customers. They are called credit unions though. :)
Very true. We have to have direct deposit, 10 debit card transactions a month, and estatements. Not that hard to achieve but still jumping through the hoops as you stated.
An account is an account, a fund isn't. Read your account disclosures.
Thanks for the article-very useful. One question-who has a checking account with 6% APY? That's 6% more than I get.