What should you know about money market accounts
There are two types of money market accounts, bank or credit union and broker.
The safest money market account is offered by a bank or credit union. It is a type of savings account offered by banks and credit unions that is just like regular savings accounts. The difference is that they usually pay higher interest, have higher minimum balance requirements, and only allow a specific number of withdrawals per month (usually between three and six). Another difference is that, similar to a checking account, many money market accounts will let you write up to three checks each month. So, you will have a check book and register.
What is the difference between a bank money market and a brokerage money market?
Bank money markets are safer, and they have less leeway with how the invest your money. A brokerage money market account is riskier, and can use your investment in more diverse ways.
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How safe is a money market account?
With bank accounts, the money in a money market account is insured by the Federal Deposit Insurance Corporation (FDIC), which means that even if the bank or credit union goes out of business your money will still be there.
With credit unions, the money in a money market account is insured by the National Credit Union Administration (NCUA), a federal agency, and it means the same thing.
With a brokerage money market account, chances are your money is not insured. Thus, how safe it is with a broker, just depends on how honest the broker is. Some people who open money markets with brokers get highly taken advantage of and lose thousands, while others make a nice return.
The contract.and how a money market account works:
You should always read the contract of your money market carefully. Some scammers set up false money market accounts, and can even get you to leverage your home and all of your assets against their investing as well. If you are not careful, you could lose a lot of your assets. However, with a bank this will not happen.
The reason you put money into a money market is because the account earns interest just like in a regular savings account. Interest is essentially the money the bank pays you so that they can use your money to fund loans to other people. That doesn't mean you can't have your money whenever you want it, though. In most money market accounts, you can close your account and withdrawal all of your funds whenever you want.
Most money market accounts work like this:
You open a money market account at the bank.
The bank pays you interest on the money that you deposit and leave in that account.
The bank then loans that money out to other people, only they charge a slightly higher interest for the loan than what they pay you for your account.
The difference in interest they pay you verses the interest they charge others is part of how they stay in business.
Who is managing your account?
This is something you will want to know. Basically the bank will be loaning out your money and getting interest paid on that loan, or they will invest your money. So, you want to know who is going to be doing what with your money. In bank accounts, it is not as big of a deal because it is insured money.
What is the prospectus, in other words, where is your money being invested?
You will want to read the newsletters you are sent, and take a look at the prospectus, in other words, you should have a knowledge of where your money is being invested.
In most money market accounts you can only withdrawal so many times a month without penalties and fees, so know what these fees and penalties are.
