Savings play an important role in any financial plan. People need money and are often on the lookout for ways to make their money grow. Unfortunately it can get confusing as there are many different ways in which to save. You can put your money in a savings account at a bank. However, you will likely get a low savings interest rate in a bank and so your money will take a while to grow. Another option is to invest it in the stock market. The downside is that buying stocks can be a risky business. High financial risk means that you can potentially lose a lot of money, but also may mean that your money could grow rapidly. Another less risky option is the money market account which offers an alternative to high risk investments.
Money market accounts are popular because interest rates are often higher than a regular bank savings account and you do not have the risks associated with dealing in stocks. When you make a deposit into a money market account your money is then invested by your financial institution government, financial or corporate securities. Any money return that is made is then divided up between you and the financial institution.
Usually money market accounts have certain stipulations that differ from regular bank accounts. This means you do not have the same access to your money. For instance you usually need to keep a minimum balance in the account at all times. You are also restricted to the amount of withdrawals you can make in a month and there may also be a waiting period while money is being transferred. You will usually be charged a fee if you exceed the allowed amount of withdrawals. A money market account is for long term savings or perhaps emergency savings where you will leave the money undisturbed for prolonged periods. All funds in a money market are FDIC insured and so your money is safe if your bank or lending institution goes bankrupt.
The term money market is also used to describe short term borrowing or lending with a time frame of a year or less. Money markets make use of CDs, T Bills, repos, commercial papers, federal funds etc., to provide liquid funding in the world’s financial markets. These types of short-term transactions differ from the capital markets which offer long term funding usually supplied by bonds and equity.
Money market funds are similar to mutual funds but generally have even lower risk attached to them. Because these types of funds are not federally insured you should always check out the fund’s prospectus and most recent shareholder report before investing in them.