The Federal Reserve has been raising short-term interest rates consistently since June 2004, and is likely to do so twice more this year. This offers a chance to take advantage of the market by investing in cash with a money market account. These accounts are very low-risk, and right now have an average return at right around 4.4%.
What is a money market account?
A money market account comes in the form of checking and savings accounts. This allows for highly liquid assets with a decent rate of return (at least right now). Money market accounts are similar to money market funds, sharing many of the same characteristics. However, when you invest in a money market account, you usually do so through your bank or credit union. This means that your account is insured through the FDIC or the NCUA. This can be a substantial relief for many people, as a money market fund is not federally insured.
While there are plenty of advantages to money market accounts, it is important to realize that for some people there are drawbacks. Most money market accounts require a minimum balance of $5,000. If you drop below that, you could incur penalties. Additionally, when it comes to money market checking accounts, you might find yourself limited in the number of transactions you can make, as well as the nature of those transactions. As with any investment, no matter how low-risk, it is important to consider how well it fits into your over all financial plan.
Because a money market account earns returns based on cash investments, rising short-term interest rates tend to increase a money market annual yield. And because the Federal Reserve is unlikely to reduce interest rates for at least a couple more quarters (if then), a money market account has a fairly good chance of doing well. Money market returns are averaging better returns than stocks right now.
Of course, now is not the time to dump all your stocks, either. Tomorrow we´ll take a look at how you can use the current stock market to your advantage.