Money market investing and savings accounts

Savings accounts such as money market accounts and CD's (certificate of deposit) are a great way for people to put money away and also earn a modest return on their money, without the risks associated with the stock market or other similar investments. Although technically money market investing isn't actually investing, it is a form of savings.

Money market accounts are good for people who want the security of having their money in cash, knowing it will not lose value at any time. Additionally, money market accounts offered by banks and other financial institutions in the United States are insured by the federal government through the FDIC (Federal Deposit Insurance Corporation), up to $100,000. So, you can sleep easy at night knowing your money is safe.

Although I am an avid stock market investor, I always keep a percentage of my assets in an interest bearing money market account because I want to know I have a cushion if I ever need it. Whether I need money for unexpected expenses or some other reason, I want to know I can count on that money if the time comes.

There are three main types of savings accounts, detailed here:

Basic or Traditional Savings

This type of account often comes with no minimum balance requirement and pays a modest rate of interest. Money can be withdrawn without penalty.

Money Market Accounts

A money market account is similar to a passbook savings account, but likely has a minimum balance requirement, which can range from a few hundred dollars to several thousand. Money market accounts also tend to pay out a higher rate of interest than basic savings. Fees may be charged if your balance falls below a minimum.

CD (Certificate of Deposit)

A CD is like a basic savings account, but it is at a fixed interest rate for a fixed term of time. It could be 6 months, 1 year, or more. There may or may not be a balance requirement, and your interest rate is determined by the amount of your deposit, and the term. A typical CD term might be if you deposit $10,000 for 1 year, your bank agrees to pay you a fixed interest rate, almost always much higher than a money market account. The beneift of this type of account is that if interest rates fall, you are still guaranteed the higher interest rate. The drawback is that if you need to withdrawl your money for some reason, you can incur a penalty.

Who pays the best rates?

Online banks often pay better savings rates than banks with branches. Why is this? Because maintaining a branch network costs money, which is overhead, which is always passed on to you, the customer - either in the form of higher fees or reduced interest earnings on your savings accounts.

I have found a way around this by opening a free checking account at a bank with branches, and then opening a money market account with an online bank, which pays me a high interest rate. My checking account and online savings account are linked, so when I need to access my savings account all I do is transfer money to my checking account - which is all 100% free!

I highly recommend this type of setup if you hate paying fees as much as I do, but also want a good rate of return on your savings. You can shop around to find the best savings rates and check with different banks to find out if they have free checking, or if you want to save time I have created links to the banks I use in the Open An Account tab on the menu. Opening one or both accounts online only takes a few minutes, and you'll be good to go!