Money Market Accounts

Are you earning enough?

One of the main places to park your emergency fund is in a money market account. Money market accounts are Federal Deposit Insurance Corporation (FDIC) insured higher interest-earning savings vehicles, primarily offered by banks and credit unions. They are similar to regular savings accounts, but have more restrictions in exchange for offering higher interest rates. While it's true that your emergency funds should be liquid and available on a moment's notice, if they aren't earning more than the rate of inflation (approximately 3 percent), your purchasing power will erode over time, reducing your net worth.

Banks have become very comfortable paying savings rates higher than 3 percent. If you are going to go to the effort of putting aside three to six months' living expenses, you might as well find a bank that will grow your money while it waits for an emergency to occur. The worst thing is to leave it in a checking account paying little or no interest. However, that's exactly what many people do.

Before moving your money all over the place, consider the money market account options at your existing bank. What interest rate do these pay? Is there a minimum amount to open an account? Can you earn more with a larger balance? What are the fees associated with the account? You might be surprised by what your bank will do to keep your business. That said, it's important that you also check out the competition's money market accounts. See what the online and offline banks are offering. Every bank's products are slightly different. Once you've had a chance to absorb the information, decide which best meets your needs.

Another question to ask yourself is what other products exist that offer even higher rates than money market accounts. Products like money market mutual funds and certificates of deposit might be just what the doctor ordered. When a product pays higher interest, often it has certain terms attached that make it more difficult to move your money. You relinquish immediate liquidity in return for greater earnings. In the case of the emergency fund, that can be a double-edged sword. On the one hand, if you can't touch the funds, you can't spend them. On the other, if you don't have immediate access to those funds, you've defeated the purpose of the emergency fund.

If you are one of the disciplined few who can save three to six months' living expenses, don't obsess about earning the ultimate rate of return from those funds. Commit to earning more than three percent annually. Then sit back and appreciate the fact that you were able to do so. Not many can.

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