Short Term High Yield Investments – You may be wondering where to keep the money you’ve started to accumulate. Some of the more popular options are money market funds, money market accounts (MMA), and regular savings accounts. All three are highly liquid places to park money, meaning you can easily access funds whenever you need them.
But there are some important differences you should know. Most traditional savings accounts offer fairly nominal interest rates, so you may find that money market funds or MMAs are a better alternative, as they usually offer higher returns. And unlike savings accounts, many funds and money market accounts also let you write checks and easily transfer money into your savings account.
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Money market funds are mutual funds offered by brokers, investment firms and financial services companies. They raise money from various investors and invest in short-term, high-quality bonds. While they are technically investments, they act more like cash-on-demand accounts in that money is easily accessible.
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These mutual funds may have a minimum initial investment requirement as well as balance requirements and transaction fees. There are also associated fees that bank accounts don’t have to incur, including an expense report, which is a percentage fee charged to the fund for management expenses.
Dividends in mutual funds can be taxable or tax-free, depending on how the funds invest. They are not insured by the Federal Deposit Insurance Corporation (FDIC), although they are strictly regulated by the Securities and Exchange Commission (SEC).
Their performance is closely linked to the interest rates set by the Federal Reserve. Very low rates mean these funds may not outperform a savings account when fees are factored in. So do your research before putting your money into a money market fund. They may not even produce as high a return as the stock market, but they carry far less risk and tend to have better returns than an interest-bearing savings account. However, keep in mind that just like any other investment, there is no guarantee of returns.
Although money market accounts (MMAs) look similar to money market mutual funds (and people often confuse the two), they’re actually closer to savings accounts. In fact, one way to think of them is like a savings account with some of the benefits that come with a checking account.
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MMAs are interest-bearing on-demand accounts held with a bank or credit union. They are FDIC insured if they are with a bank and National Credit Union Administration (NCUA) insured if they are with a credit union.
Money market accounts often have a higher minimum deposit or balance requirement than regular savings accounts. But they tend to offer higher yields, which are more on par with money market funds. The interest rates offered by an account can vary depending on the amount of money you keep in your account.
Some banks allow MMA account holders to write checks and allow the use of a debit card for purchases, wire transfers and ATM withdrawals. Although the Federal Reserve lifted restrictions on withdrawals (account holders could only make up to six withdrawals per month) under Regulation D in 2020, your bank may still limit your ability to access the funds in your account. It is therefore important to check with your financial institution about the rules associated with your money market account.
Money market funds and money market accounts sound the same because they invest in and generate interest from the same kind of thing: the short-term debt instruments that make up the money market. For example, a money market mutual fund or MMA invests in certificates of deposits, government bonds, and commercial paper while savings accounts do not.
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Savings accounts are offered to consumers by banks, credit unions and other financial institutions. They are generally considered a safe and convenient place to keep your money while saving up for a big purchase or for the future. Because of their liquidity, savings accounts are well suited for short-term needs. This is why many people use traditional savings accounts to hold their emergency funds.
These types of accounts are interest bearing, meaning they earn money and grow over time. They tend to pay lower interest rates than any other type of savings vehicle, including money market deposit accounts or mutual funds, although some online banks offer high-yield savings accounts with more competitive interest rates. Rates may vary depending on how much you keep in your account.
Money market accounts and savings accounts are considered very low risk vehicles. But of course there’s the usual safety trade-off: less risk equals lower returns. Simply put, you won’t make as much money in these two vehicles as you would in other investments that have a higher risk. Here because:
MMAs are also still subject to changes in interest rates. If the Fed decides it wants to stimulate the economy and lowers the federal funds rate (at which commercial banks borrow and lend each other their excess reserves overnight), it could send a ripple effect through the financial markets. . This can lead to lower interest rates earned through these bank accounts.
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How interest is compounded in your money market or savings account, such as annually, monthly, or daily, can have a significant impact on its performance, especially if you maintain a large balance in your account.
Let’s say you want to stick with one of the bank accounts. Researching the details about the different options within each type will help you avoid high fees and account minimums.
You can opt for a money market account if you have a significant amount of money, at least four figures, to deposit. And it makes sense if you can easily maintain such a minimum balance in the account for a longer period of time. You will be rewarded for this with a slightly better performance. The higher your balance, the higher the interest rate.
If you want to write checks to the account or withdraw from it with a debit card, the money market account also offers these privileges. But because you earn more interest, it’s a good place to hold funds for a fairly long period of time, certainly at least a year, after a medium-range spend or goal.
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A savings account is a better option if you have a more modest amount (less than $1,000) to deposit and don’t want to worry about keeping account minimums or fees. If check writing/consistent liquidity isn’t a problem – other than the occasional transfer, you pretty much keep the money in there – the savings account will work just fine for you, too.
Since you can easily take money out of it and not make much, a savings account is good for short-term goals: somewhere to park money until a vacation or a big purchase.
A money market fund is an alternative to money market and savings accounts. MMFs are mutual funds that invest in short-term debt, such as treasury bills, CDs, commercial paper, cash and cash equivalents. These are all very liquid assets and MMF money is quite accessible meaning you can often get the funds out the same day. Some MMFs also come with checks or debit cards.
Another possibility is a high-interest checking account. They have all the features of traditional checking accounts and, as the name suggests, offer interest rates that are competitive and sometimes higher than money market accounts (although they often limit the amount of balance they will pay out). . They can also request a certain number of transactions per month.
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Both a money market account and certificate of deposit are insured, interest-bearing financial accounts offered by banks and credit unions. However, a money market account is an open (i.e. continuous) sight deposit account. This means you have access to your funds almost when you want them.
Your bank may limit the number of withdrawals or transfers you can make in any given period, but this is a very liquid account and you can close the account if you wish without penalty. Funds in the account accrue interest at a floating rate.
Unlike a CD, you deposit a certain amount with the bank for a limited time, from one month to 10 years. During that time, the CD earns interest, usually at a fixed rate. This is a higher rate than the MMA offers, but the catch is that your money (both principal and interest earned) is locked up for the entire term. You will likely face a fee or early withdrawal penalty if you access the funds. So no checks, wire transfers or cash – that’s the trade for the biggest return on your deposit.
Because the rules and rewards for money market accounts vary widely, it’s worth shopping. A good place to start is with your current financial institution. While it doesn’t matter that you have your MMA in the same bank as your checking or savings account, there may be special offers, privileges, or benefits to having or linking multiple accounts.
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You don’t have to be limited to your local region or even a brick and mortar establishment. Indeed the
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