Choosing between a savings account and a money market fund can be a difficult task. Everyone wants the highest return and both instruments are useful for people who want to limit their risk. Money market funds offer higher interest rates but the risk is a little bit higher. It is even possible you lose some money but chances are very small.
The difference between a savings account and money market funds is the flexibility and the risk you want to take. A money market fund is a mutual fund which invests in cash, short term deposits, CD’s, treasury issues and other short term investments with a time frame of maximum 13 months. A savings account is much easier and the difference between the interest rates can be so low that you have more benefit with opening an online savings account.
In periods when the interest rates of online savings accounts are low you will also not receive a high return in your money market fund. The market situation is the same and interest rates are comparable; in general we can say that money market funds offer higher returns but there are more risks. It is necessary to investigate the risks before you want to invest in a money market funds.
Money market funds are useful for people who want to invest some money but are afraid of taking too much risk. Money market funds can be considered as safe investment instruments but there is always a small risk you will lose money. Inflation is the highest factor and can cause that the share price which is often $1.00 can drop. Fund managers will always try to keep the share price at $1.00 and in return they offer a higher interest rate. These rates are variable and you don’t know how much you will earn in one month or more. If you open a savings account you know exactly the interest rate of the current month but also these can change the month after.
A savings account is more flexible than a money market fund because there is no limit in the quantity of withdrawals. When you invest your money in a money market fund your withdrawals are limited to 6 times in one month. Both accounts are useful to park your money for a while if you consider making an investment and during this time you accumulate interest. Money market funds are maybe the best choice if you want to reach the highest interest but differences can be very small compared with an online savings account.
If you invest in a money market fund you need to be aware that there are also fees and these funds are not insured by the FDIC. The fees vary from fund to fund and it is important to check the expense ratio before you decide to park your money in a money market fund. There are often no fees in a savings account and if you don’t consider keeping your money for a while in a money market fund you can have more benefit with an online saving account.
A savings account and a money market fund are both good financial instruments which is useful for emergency and to accumulate some interest. Both are real safe but with an online savings account you have almost no risks. Money market funds are certainly useful in the portfolio of a safe investor and also if you want to park your money for a while. There are certainly circumstances when you best can choose money market funds over savings account but it is individual and time horizon can be important.