What is a High Interest Money Market?

Charity Delich
Charity Delich
Man climbing a rope
Man climbing a rope

A high interest money market account is a type of low-risk investment that usually provides investors with better interest rates and higher earnings than traditional savings accounts. Money market deposit accounts and money market mutual funds are two common types of high interest money market accounts. Although these two kinds of accounts are often generically referred to as high interest money market accounts, they are distinctly different kinds of investments. Savvy investors should take care to understand their differences before making any investments.

A money market deposit account is a hybrid between a savings account and a checking account. In this type of account, an investor deposits money at a financial institution. The financial institution is then liable to the investor for the amount of the deposit and any associated interest. In the United States, money market deposit accounts are often insured by the Federal Deposit Insurance Corporation (FDIC).

Money market deposit accounts usually require investors to maintain minimum balances. Additionally, account owners are typically permitted to withdraw money market funds from their accounts on a limited basis, usually three to six times each month. Account owners can also write a limited number of checks each month from their money market savings deposit account. Deposit account offerings can vary greatly depending upon the financial institution used. Key differences in deposit accounts include the money market rate that is offered, the number of withdrawals that are permitted by the financial institution, the minimum balance requirement, and the liquidity of the funds placed in the account.

Money market mutual funds are distinct from money market deposit accounts. In a high interest money market mutual fund, an investment company usually purchases safe, short-term securities with the fund’s money and on behalf of investors. Treasury bills, certificates of deposit and commercial paper are examples of securities often purchased by these types of funds. Unlike money market deposit accounts, the FDIC does not insure money market mutual funds.

Most financial institutions offer at least one kind of high interest money market account. Investors seeking to find the best money market account should closely examine their own financial needs before selecting an account. An account with the highest money market interest rate may not always be the best option. For example, if an investor will need to write several checks from his account each month, he should not consider money markets that offer one or two monthly withdrawals, even if that account has a higher interest rate.

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