How Do Money Market Accounts Work

Money market accounts are one of the most popular forms of investment. The low risk, long-term yield is attractive to those who don't want to endure the volatility of the stock market or other investment options.

A money market account can be described as a savings account with a higher than average interest rate. Almost every bank or credit union offers money market accounts to their customers, and the funds are used for other short-term loans for others. The bank then uses daily compounded interest to pay you and pays out monthly dividends, including accumulated interest. In other words, the bank pays you interest on the total, then puts that interest back in to increase the total and pays you interest on that again.

The pros of a money market account include the security of the investment. There is also immediate liquidity with little or no penalty. This means you can take out money on short notice with little impact. Money market accounts are also structured so you can write a limited number of checks from the account as well. The interest rates for money market accounts will always be better than a traditional savings account, earning you more money over time. Another bonus of a money market account is that you can add funds to the account whenever you choose. Regular contributions to the account will make it grow even faster.

The cons of money market accounts include the interest rate, which is high compared to a savings account, but low compared to other forms of investment with slightly higher risk. Your money could earn far less in a money market account than it would in other kinds of vehicles, such as mutual funds or stocks. Many money market accounts also require a minimum investment or balance ranging from $500 to $50,000, depending on the setup.

Money market accounts are covered by the FDIC, the Federal Deposit Insurance Corporation, just like checking and savings accounts. If anything should happen to the account, the money is covered up to a set amount. 

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Money markets offer the lowest risk to your initial investment. They're a great tool for short-term use or liquidity, but their low rate of return makes them a poor choice for long-term investing.

Money market funds are a mutual fund that focuses solely on low risk securities. Many people don't realize, however, that they differ from money market accounts.

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There's a reason why so many investors choose to place their money in a money market account. That said, it is still important to be sure that a money market account is right for you.

Are all money markets the same? Are they all safe? Do you care? You should. Money market accounts that are offered by a bank are safer than the mutual fund money market.

Leaving your money in a regular savings account no longer earns you very much money. Usually in a regular savings account you would receive zero point some percentage. A good way to earn additional money is through a high interest bearing account.

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