Investing can be a risky journey. There are many different factors to consider before committing to any investment channel. If you invest in stocks, you have to face the risk of market and economic crash. Bonds carry with them both interest rate and inflationary risks. But the money market account is the only market where you are always safe.
Money market accounts’ purpose is to keep our money safe and liquid. But people often misunderstand money market accounts. How do you avoid some of the mistakes most people make when they invest in these low-interest bearing vehicles?
What are Money Market Accounts?
First, it’s important to understand these accounts and what they offer. Money market accounts are deposit accounts held at banks and credit unions. Referred to as money market deposit accounts (MMDA), they come with features that make them distinct from other savings accounts. They can be a great place to hold your money temporarily. Especially when the market is raging with uncertainty, you can’t be sure of any other safe place.
When you hold a money market account, the Federal Deposit Insurance Corporation (FDIC) surely insures your balance up to $250,000. There is typically a required minimum balance. An investor whose balance falls below the minimum usually incurs a fee.
These accounts are interest-bearing—generally single-digit returns—and may pay a little more than a traditional savings account. That’s because they can invest in low-risk, stable funds like Treasury bonds (T-bonds) and typically pay higher rates of interest than a savings account. While the returns may not be not much, money market accounts are still a pretty good choice during times of uncertainty.
Money market accounts serve a singular purpose: To keep your money parked. Money, though, does nothing unless it is moved, and will ultimately require the investor to research their options and invest more diversely.