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Money market accounts are like regular savings accounts with distinct features that set them apart. Investors must hold a minimum balance for a specified period of time and are limited to the number of transactions allowed. Money market accounts are not money market funds, which are like mutual funds. These accounts are also prone to inflationary risk, and should not be used as the prime source of investment.
I remember being a young teenager in the late 80’s-early 90’s and first learning of the words “money market” and “mutual fund”....I always thought that the word “market” meant it HAD to be invested in the stock market!
My first impression (not based on any formal description) of MM accounts was that these bank accounts were like fixed rate savings accounts except that they paid a "market rate" of interest, i.e. their rates floated more readily.
Regarding the Investopedia piece, it has a variety of its own misconceptions. IMHO that site has become much less solid and reliable than it used to be.
- It correctly says that you can find MMAs at banks and at credit unions. But it then goes on to say that "When you hold a money market account, you can be certain your balance is insured by balance the ... FDIC." Credit unions are not insured by the FDIC.
If they're federally chartered, they must be insured by NCUA, which is the federal agency analogous to the FDIC for credit unions. But if a credit union is state chartered, it may opt for NCUA insurance or do something else. For example, Rocky Mountain Credit Union is insured by a private insurer, American Share Insurance (ASI). For five years in the 2000s, one of the larger credit unions, Patelco, abandoned NCUA for ASI before returning five years later.
- It says that you're limited to "a total of six transfers and electronic payments per month". Not quite. Regulation D limits you to six "convenient" transfers. It permits an unlimited number of "less convenient" transfers, such as transfers from your MMA to your checking account at the same bank via ATM or in person. (A phone transfer or an online transfer is considered convenient and counts against the six).
- "Money market accounts are like regular savings accounts with distinct features that set them apart." Not really. From the Reg D reference cited above: "Before the mid-1980s, money market deposit accounts (MMDAs) had characteristics that distinguished them from ordinary savings deposit accounts. Now, however, they have the same characteristics as savings deposit accounts and are subject to the same transfer and withdrawal limits."
Arguably the one remaining difference is that MM accounts offer checkwriting, but as even Investopedia admits, checkwriting is not a defining attribute of MM accounts. ("Many [i.e. not all] MM accounts come with check writing ability.")
- "But they do require a larger minimum balance than traditional savings accounts." That's often the case, but not a requirement. Using the link provided in the article for MMA rates, I found BBVA USA, where all the savings accounts (including MMA) have a $25 min.
This Investopedia piece reads as though the writer just put her impressions to paper, without checking for accuracy or completeness. Since banks are FDIC insured, of course all MMAs are. Since many banks have higher mins for MMAs than for savings accounts, they all do. Since online (and phone) transfers count against the limit of six per month, all transfers must.
Additional info: one reason for the limitations on 'convenient' transfers is that it affects the amount of money the FI can assume it will have on deposit through the month and therefore the insurance premiums (whether to FDIC or NCUA or other) that the FI has to pay. Checking accounts are considered transient, and also more subject to fraud, while savings, money markets and CDs are less so. The insurance costs vary slightly.
Also, a reason why money markets typically earn higher dividends (although not as high as CDs) from the FI is that they can assume the money is more than likely going to be there for a while, so they can make loans against it, etc. Checking account balances fluctuate too much. Regular savings are somewhere in-between.
Comments
Regarding the Investopedia piece, it has a variety of its own misconceptions. IMHO that site has become much less solid and reliable than it used to be.
- It correctly says that you can find MMAs at banks and at credit unions. But it then goes on to say that "When you hold a money market account, you can be certain your balance is insured by balance the ... FDIC." Credit unions are not insured by the FDIC.
If they're federally chartered, they must be insured by NCUA, which is the federal agency analogous to the FDIC for credit unions. But if a credit union is state chartered, it may opt for NCUA insurance or do something else. For example, Rocky Mountain Credit Union is insured by a private insurer, American Share Insurance (ASI). For five years in the 2000s, one of the larger credit unions, Patelco, abandoned NCUA for ASI before returning five years later.
- It says that you're limited to "a total of six transfers and electronic payments per month". Not quite. Regulation D limits you to six "convenient" transfers. It permits an unlimited number of "less convenient" transfers, such as transfers from your MMA to your checking account at the same bank via ATM or in person. (A phone transfer or an online transfer is considered convenient and counts against the six).
- "Money market accounts are like regular savings accounts with distinct features that set them apart." Not really. From the Reg D reference cited above: "Before the mid-1980s, money market deposit accounts (MMDAs) had characteristics that distinguished them from ordinary savings deposit accounts. Now, however, they have the same characteristics as savings deposit accounts and are subject to the same transfer and withdrawal limits."
Arguably the one remaining difference is that MM accounts offer checkwriting, but as even Investopedia admits, checkwriting is not a defining attribute of MM accounts. ("Many [i.e. not all] MM accounts come with check writing ability.")
- "But they do require a larger minimum balance than traditional savings accounts." That's often the case, but not a requirement. Using the link provided in the article for MMA rates, I found BBVA USA, where all the savings accounts (including MMA) have a $25 min.
This Investopedia piece reads as though the writer just put her impressions to paper, without checking for accuracy or completeness. Since banks are FDIC insured, of course all MMAs are. Since many banks have higher mins for MMAs than for savings accounts, they all do. Since online (and phone) transfers count against the limit of six per month, all transfers must.
And so on. Inferences from impressions.
Additional info: one reason for the limitations on 'convenient' transfers is that it affects the amount of money the FI can assume it will have on deposit through the month and therefore the insurance premiums (whether to FDIC or NCUA or other) that the FI has to pay. Checking accounts are considered transient, and also more subject to fraud, while savings, money markets and CDs are less so. The insurance costs vary slightly.
Also, a reason why money markets typically earn higher dividends (although not as high as CDs) from the FI is that they can assume the money is more than likely going to be there for a while, so they can make loans against it, etc. Checking account balances fluctuate too much. Regular savings are somewhere in-between.
PS: FI is financial institution.