Money Market Funds vs Money Market Accounts: What’s the Difference?

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It’s easy to confuse a money market account with a money market fund, but there’s a bigger difference between these two savings products than a single word.

While both provide a relatively risk-free place to put your cash, a money market account is a deposit account held at a bank or credit union that is virtually indistinguishable from a savings account. A money market fund is a mutual fund in which you invest, meaning it is governed by an entirely different set of rules and regulations than a bank deposit product.

Below, we’ll explore in more detail the differences between the two, and give you a better idea of which one is right for your savings goals.

Money market accounts vs. money market funds

The most important difference between a money market account and a money market fund is that the first is a risk-free deposit and the second is an investment product that is not free of risk.

Money market accounts are deposit products, and as such they are insured up to $250,000 by the FDIC for banks, or the NCUA for credit unions, which eliminates the risk of losing your money.

Money market funds are investment vehicles that place their clients’ money in short-term securities, commercial paper and ultra-safe investments. They are securities regulated by the Securities and Exchange Commission (SEC). Because this mutual fund is an investment, there is no ironclad guarantee by the government that you won’t end up losing some of the principal you put in. This could happen if the market tanks and the funds “break the buck” — meaning their net asset value falls below $1.

As the summary prospectus for Vanguard’s Prime Money Market Fund spells out, “You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.” This last happened in 2008, when the Primary Fund reported customers would only get 97 cents for every dollar invested thanks to the chaos of the financial markets at the time.

 

Money Market Account

Money Market Fund

Product type

A specialized savings account with a bank or credit union

A low-risk mutual fund which invests in short-term debt securities

Access to funds

Can withdrawal money up to six times each month

Same-day settlement without any limits on transactions

Level of risk

Insured by the FDIC or NCUA up to $250,000 per account

Low-risk investment product, with no guaranteed return of your money

Utility

Earns a decent interest rate for long-term savings

A higher-yield product to grow money for a short-term goal, such as a home or car purchase

When you need a money market deposit account

While hearing “you need to save more money” ranks right up there with “eat less pizza” as advice that causes your eyes to roll straight to the back of your skull, it’s unfortunately almost always true. A money market account is one of the most powerful tools you have at your disposal to follow through on that advice, giving you an account that earns high interest while granting you easy — if limited — access to your funds for emergency spending.

It’s also virtually indistinguishable to a savings account in that both products typically earn higher interest rates than the pittance earned by most checking accounts while still retaining more liquidity than certificates of deposit (CDs).

“The differences between money market accounts and savings accounts depend on the institution that is offering them,” said Ken Tumin, founder and writer of DepositAccounts.com, which, like MagnifyMoney, is owned by LendingTree. “I’ve seen some banks offer money market accounts that have the same features as savings accounts at other banks.”

One general point of differentiation Tumin sees between savings accounts and money market accounts is that many money market accounts come with checks or an ATM card, which makes it easier to tap those funds for the sort of big-ticket emergency purchases — think of a fridge on the fritz — you’ve been saving for.

When you need a money market fund

Money market funds are the purview of brokerage firms, and they typically give investors a higher return than what they can earn via interest on money market deposit accounts. This makes it a good option for people saving for a short-term goal who don’t mind taking on a little more risk than they would with a federally-insured deposit account.

“Its yield fluctuates and will probably end up being somewhere between a savings account and a CD, but closer to the CD yield,” said Amy Goan, a CFP and former money market fund manager based in Washington. “However, if you want to liquidate the whole account and invest the money elsewhere, it’s just like any other mutual fund and the money will be available the next business day.”

One reason you may want to avoid these for the long haul is that due to the conservative nature of their investments, this mutual fund has a difficult time beating inflation.

“Long-term goals, such as retirement and education should be invested more aggressively to generate competitive return over inflation over the long term,” said Samantha Anderson, a CFP based in Ohio.

The bottom line on money market accounts vs. funds

Despite how easy it is to mix up money market accounts and funds, they both serve similar but distinct savings goals. Money market accounts provide more stability and security thanks to the FDIC/NCUA protection they have and make excellent places to park your emergency fund.

These mutual funds can perform the same function if you don’t mind the small (but still present) chance of losing some of the money invested, plus your funds will usually grow faster than if placed in a money market account. But for the money you’re planning on spending in the next year or so, money market funds provide a combination of strong returns, safety and liquidity that make them attractive investments.

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