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

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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.

These mutual 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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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What Is a Payroll Card?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Who doesn’t like payday? Your employer hands over your wages in the form of a paycheck or directly deposits funds right into your bank account. For more and more workers, however, payday means getting money on a payroll card. Payroll cards are a type of prepaid debit card provided by employers in lieu of a paycheck or a direct deposit.

According to a 2017 report from the Aite Group, a research and advisory firm, an estimated 6.4 million payroll cards will be in use by the end of 2019. The Aite Group estimates that number will increase to 8.4 million by the end of 2022.

Below, we’ll discuss how payroll cards work, identify a few things to watch out for, and answer some frequently asked questions.

How do payroll cards work?

Employees use payroll cards to withdraw their earnings at ATMs and make purchases anywhere that the card network — e.g. Visa or Mastercard — is accepted. Some cards even offer the option to sign up for online bill payments. But employees who are offered these cards may face an array of fees to access their pay, plus other potential pitfalls.

For employers, printing and sending checks can be expensive and cumbersome. Direct deposits are one way for an employer to avoid the costs associated with physical paychecks, but it’s not a viable option for employees who lack bank accounts.

A 2017 survey from the Federal Deposit Insurance Corporation (FDIC) found that approximately 8.4 million households don’t have a bank account at an FDIC-backed institution.

“There are lots of people who are unbanked or underbanked but still have jobs,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “If they get a paper check, they have to go to a check-cashing company that is likely to charge a very high fee.”

Payroll cards can be a great way for employers to pay unbanked or underbanked employees, giving them access to their money without the expense of visiting a check cashing firm. However, these cards are not always free of fees and complications.

What are the problems with payroll cards?

Before you agree to sign up for a payroll card, make sure you read the terms and conditions closely and understand how the card works, what fees you’ll have to pay and which usage-based fees may apply. Benefits, drawbacks and fees can vary depending on the card provider. Here are a few things to look out for:

There may be fees to access your pay

New consumer protections and disclosures for prepaid cards and payroll cards went into effect on April 1, 2019. The rules include a requirement to provide a clear chart of common fees to users before they sign up for a card. This should give users a clear, simple fee chart to help them comparison shop and understand what fees they may face when using their payroll card.

Taking the E1 Visa® Payroll Card as an example, here are some of the fees that payroll cards might charge:

E1 Visa® Payroll Card Fees

Monthly Maintenance Fee:

$2.95 in months when there is no payroll deposit on the card; no fee in a month when there is a payroll deposit.

ATM Cash Withdrawal MoneyPass Network Fee:

$1.50; Users get one no-charge withdrawal transaction per month

ATM Cash Withdrawal Non-MoneyPass Network Fee:

$2.50

ATM Cash Withdrawal Foreign Fee:

$3.50

ATM Balance Inquiry Fee:

$0.50

ATM Decline Domestic Fee:

$0.50

ATM Decline Foreign Fee:

$3.00

Funds Transfer Fee:

$2.00

Paper Statement Fee:

$2.00 (per monthly paper statement requested)

Lost/Stolen Card Replacement Fee:

$10.00

Express Delivery Fee:

$40.00

Account Closure Fee:

$15.00

Currency Conversion Fee

3% per transaction

Source: E1 Visa® Payroll Card

Looking more closely at this fee schedule, it’s clear you can avoid some of the fees by being conscious of how you use the card. The monthly maintenance fee is waived in months when there are deposits on the card from your employer(s), and you get one free ATM withdrawal per month. However, besides the single free ATM withdrawal, it’s difficult to avoid paying fees to access your money, and the account closure fee is high and unavoidable.

Not all cards offer the same features

The payroll card your employer offers may not be a great fit with your financial habits or your normal routine. For example, these cards may be part of large ATM networks and may offer free withdrawals from in-network ATMs. However, like with the E1 Visa card above, there may still be a charge for in-network withdrawals. If there aren’t in-network ATMs nearby, you could wind up regularly paying higher out-of-network withdrawal fees.

Some cards offer additional ways to access your money without fees, such as getting cash back when you make a purchase or offering paper checks that are tied to the account.

Another potential drawback is that these accounts may limit how much money you can keep in the account, and how much you can withdraw or transfer each day.

Holds may be placed on your account for certain purchases

Certain transaction types can trigger a payment hold could be put on funds in your account when you’re using your card for purchases. For example, if you use the card at a gas station, additional funds in your account might be put on hold and it could take several days for the transaction to finalize and the funds to be released. This could mean an extra $100 that’s in your account won’t be available for the following week.

It’s not a stepping stone toward a checking or savings account

“In some ways, [a payroll card] could be working to the detriment of some employees because it’s keeping them from seriously considering opening a checking account at a bank or credit union,” says McClary. “The money isn’t working for you.”

Conventional checking accounts lack many of the small fees that can make a payroll card a bad deal. Additionally, conventional banking options include savings accounts with higher interest rates.

If you need to use this type of card, you may have trouble opening a checking or savings account due to a negative bad banking history — perhaps you bounced a few checks or closed an account that had a negative balance. Remember, many financial institutions offer second chance bank accounts, so don’t let a bad payroll card deal prevent you from pursuing a regular banking account. McClary adds that, “there are programs available in every state to help people open a checking or savings account.”

Pros and cons of payroll cards

Pros

  • Quickly and electronically receive your pay, avoid check-cashing fees and keep your money in a secure account rather than having to worry about carrying cash.
  • Many cards offer free bill pay services, which can make it easier and cheaper to pay your bills versus using money orders or cashiers’ checks.
  • You can manage your money online or with a mobile app (if the card company offers one).

Cons

  • Payroll cards charge fees that can be difficult or impossible to avoid.
  • Very often you have no choice over which payroll card the company will offer.
  • The card might have a maximum daily withdrawal or transfer limits.
  • You won’t earn interest on your money and it may be more tempting to spend money when you don’t separate your savings.

FAQ on payroll cards

State laws may require your employer to give you free access to some or all of your wages at least once each pay period if you use a payroll card. Depending on where you live and the program, your card could waive the first ATM-transaction fee or give you an alternative way to access your wages for free, such as a check that’s linked to the account.

No, you do not. Employers must give you at least one alternative to using a payroll card. However, this alternative could be a direct deposit (rather than a paper check), which isn’t especially helpful for unbanked employees.

If you don’t like the company’s card offering and don’t want or can’t get a bank account, you could sign up for an alternative prepaid debit card on your own — check out our top picks. You may then be able to sign up to have your pay directly deposited onto the card you chose rather than one your employer picked.

Some cards may offer this feature, but others do not. Review the terms of your employer’s program to see if this is an option.

Some cards will let you get cash back when making a purchase, which could be a convenient and free way to get cash from your account.

There’s no credit check or requirement to get or use a payroll card.

Some cards come with zero liability coverage from the card networks, like Visa or Mastercard. Even without that level of protection, you’ll have the same protections as you would with a debit card. You won’t be liable for any transactions after you report your card lost or stolen and you’re limited to $50 of liability for charges that already occurred if you report the card lost or stolen within 48 hours.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at [email protected]

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What Are Liquid Assets?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You’ve heard it countless times: Build your assets and invest for the future. It’s sound advice, but if you needed money right now, how easily could you turn your assets and investments into cash?

All of your assets have value, but liquid assets are the ones you can quickly turn into cash without incurring any significant fees or penalties. Non-liquid assets either take time to sell or may lose value if you need to quickly turn them into cash.

The money you have in your checking and savings accounts, accessible on demand with a debit card? That’s a highly liquid asset. The RV parked in your driveway? It takes time and expense to sell, making it a non-liquid asset.

All of your assets and investments can be liquidated, if necessary. But before you sell anything, financial planners say you need to take stock of your asset portfolio and understand the liquidity of your holdings.

What to know about liquid assets

Simply put, liquidity is your ability to convert assets into cash. A liquid asset is often defined as cash or an investment with a maturity of 12 months or less, according to Marty Reid, president of Reid Financial Consulting and a certified financial planner. Holding liquid assets is important in case you need cash for emergencies, unexpected expenses or to make big purchases on short notice.

When explaining liquidity to clients, some financial advisors illustrate a pyramid of assets, with cash on hand or money in a savings or checking account at the top as the most liquid, and items or properties that take more time, effort and expense to sell, such as a house or a boat, towards the bottom.

Some assets that can fall into a gray area between liquid and non-liquid are stocks, mutual funds and longer term government securities. You can liquidate these investments for cash, but it could take up to a few days to get your money. You could also face penalties or costs, including brokerage fees, changes in market value, forfeiting interest gains or possible tax implications.

With stocks in particular, when you go to sell, you’re at the whim of the markets and it can take up to three or four days to get your funds. “What if the market is down the day you need money? If the market is down or volatile and you need money, you could be forced to sell and lose money,” said Kaya Ladejobi, a CFP and founder of New York-based Earn Into Wealth Strategies.

Examples of liquid assets:

  • Cash: Hard cash you physically have on hand to pay for expenses.
  • Checking or savings account: Money on deposit with a bank or credit union that you can access immediately.
  • Money market account: A money market, or MMA, is a high-interest savings account that can have check-writing privileges. MMAs may have more restrictions than a typical savings account, including higher minimum balances and limited number of withdrawals.
  • Certificate of deposit: Also known as a CD, this can have a duration that ranges from a few months to several years and offers higher interest rates than savings accounts. If you cash in your CD before the term expires, you could face a penalty on your accrued interest.
  • Treasury bills, notes and bonds: Government-issued securities with maturities ranging from a few weeks to 30 years. Shorter term securities are more liquid than long-term holdings. Interest rates are higher on longer securities. If you sell before maturity, you could lose value and possibly pay broker fees.

What to know about non-liquid assets

Non-liquid assets can be very valuable and marketable. These fixed assets should not be considered as a source of funds for your daily lifestyle or basic needs, but rather as tools to build long-term financial success, said Reid. If you try to sell a long-term asset on short notice, you might not receive the full benefit of their value and you could incur excessive fees associated with a hurried sale. Most of all, the sales process can be slow, which is the very reason they are not liquid assets.

That’s not to say there isn’t a market for these non-liquid assets. On the contrary, when you sell real estate or personal effects like jewelry or collectibles, you can realize considerable financial gains. Likewise, the long-term investment accounts, including IRAs and 401ks, can appreciate over time, but you’d lose value if you sold early, including potentially steep tax penalties.

“Any time you have to pay transaction costs, like using a broker, to sell something, it might be more costly. In addition to that, when you have to find a buyer and the pool of buyers is limited to turn an asset into cash, that makes it challenging,” Ladejobi said.

Examples of non-liquid assets

  • Real estate: Homes and land hold considerable value, but would take time and expense to sell, making real estate one of the most non-liquid assets.
  • Cars, RVs and boats: Recreational vehicles can also have strong monetary value, but take time and resources to sell.
  • Jewelry: Individual pieces and collections can fetch large sums, but you’ll need to find a buyer or possibly a broker to handle the transaction.
  • Furniture and collectibles: Like jewelry, these personal effects can appreciate strongly and may have enthusiastic buyers, but you’ll need to handle marketing and transactions, or work with a broker.
  • Retirement accounts (401ks, IRAs and investment accounts): These long-term investments will grow over time, eventually funding your retirement. If you cash out early (usually before you’re 59 1/2 years old), you could face steep penalties and tax implications. If you take money out of an IRA early, it could be included in your taxable income and incur a 10% additional tax penalty (there are some exceptions).

Why is asset liquidity important?

You never know what hardships or adventures life might throw your way. That’s why it’s important to have liquid assets at your disposal. Many investment advisors often urge clients to keep between three to six months of cash on-hand to pay living expenses, including housing, food and utilities.

Amit Chopra, a CFP and managing partner of Ramsey, N.J.-based Forefront Wealth Planning and Asset Management, often adjusts his advice based on a client’s age and expectations. Younger clients, he said, may want to keep six to 12 months of living expenses on hand in cash in case they decide to pursue a less stable job, such as at a startup, or a personal adventure. “Having a little more cash gives them the flexibility to do that,” he said. With older clients, who may be more established in their careers and personal lives, Chopra recommends setting aside enough cash for six to nine months of expenses.

As you prioritize how much liquidity you need in your financial portfolio, there are some additional considerations, including your tolerance for risk with investments and your long-term financial goals. To determine what’s right for you and how much liquidity you might need, the U.S. Securities and Exchange Commission (SEC) recommends investors take stock of their personal financial needs and determine the right mix of liquid and non-liquid assets. While cash and cash-equivalents are the safest investments — and the most liquid — they also yield the smallest returns.

Liquidity is a balancing act. Having cash on-hand is important for emergency car repairs or medical bills, and to fund lifestyle expenses, such as home improvements or a wedding, Reid noted. He encourages clients to mix liquidity with long-term investments.

“In real estate, they say, location, location, location. With investing, it’s diversification, diversification, diversification. How you diversify depends on your financial position, your risk tolerance level, and your long term and short term objectives,” said Reid.

The final word on liquid assets

When it comes to financial flexibility, cash is king. From there, your personal liquidity plan is a very personal choice, based on how much cash you think you need to be secure and comfortable. There’s no single right answer.

However, when it comes to realizing the value of your assets, not all investments are created equal. If you need funds quickly, with minimal headache and minor expense, cash and cash-equivalents are the easiest and fastest way. If you have more time to put into selling an asset or a longer timeline for needing money, non-liquid assets can be transformed into liquid ones, but it takes both planning and an active market to realize their fullest value. One thing is certain: The cash in your wallet and your checking and savings accounts are the ultimate liquid asset.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alli Romano
Alli Romano |

Alli Romano is a writer at MagnifyMoney. You can email Alli here

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