Making the Most of Money Market Accounts

In the early 1980s, money market accounts became a popular new competitive feature of the banking industry. They were a safe managed investment vehicle. Money market accounts invested in short-term cash instruments, and could provide both interest and check-writing privileges. Over the years, the

For both investors and non-investors, money market accounts are typically used as an alternative to checking and savings accounts. Like bank accounts, they are insured by the FDIC for investments of up to $100,000, and pay interest, although the rates are low, comparable to bank accounts. They are also widely available at banks and other financial institutions, and provide statements to keep you abreast of your account balance.

Among the advantages of a money market account is that it is a very safe place to park your money. Such an account is very liquid, and generally allows for easy access to your money through checks, transfers, and even ATMs. You have check-writing privileges as well.

The disadvantages are that you may pay fees if your account balance falls below a specified minimum, and that you're usually allowed a limited number of transactions, typically three to six — in some cases, more — but you’ll pay a transaction fee.

One manner in which many people use a money market account is as a place to keep cash that is not invested. This may be the ideal place in which to build your emergency fund. It also serves as an excellent choice for parking money prior to a major expenditure. For example, if you have been investing more aggressively for a number of years with the intent of building up a college fund, you will want to move the money into a safe, low-risk place, such as a money market account, once your future student approaches college age. While a bulk of the money may move to zero-income bonds for additional income, the money market account will be the place from which to write the first tuition check.

You may also use a money market account to build up money for investing purposes, to hold money until you have determined your investment strategy, or to put money between investment plans. In fact, many brokerage houses frequently use money market accounts for customers' cash that isn't invested, so that it will be safe and earn interest. This enables you to make investment decisions while knowing the money is in a safe account with your broker.

For either saving money outside of your investments (and you should always have a few months' worth of savings available at any time), to holding money earmarked for future investments or other purposes, money market accounts are a good choice.