Money Market Accounts and Money Market Mutual Funds
Money market accounts are similar to savings accounts, but may pay higher interest rates. However, they tend to have higher balance requirements than savings accounts, and different interest rates may apply to different account balances. For example, there may be one rate for balances below $10,000, a higher rate for balances between $10,000 and $25,000, and an even higher rate for $25,000 and above. In addition, you may need a larger deposit to open a money market account.
Unlike traditional savings accounts, money market accounts let you write a limited number of checks each month, in essence combining features of savings and checking accounts. The ceiling is usually three checks—another of the restrictions imposed by Federal Reserve Regulation D. If you exceed the limit, the bank won't process any new transactions until the next period. However, you can make all the withdrawals you want by visiting a bank branch office in person, and you can deposit that money into your checking account without penalty.
You may want to use a money market account for a portion your emergency fund, or to park money you intend to invest until you've accumulated enough to make a particular purchase.
Money market mutual funds are similar to money market accounts in some ways. They typically pay interest at about the same rate and many offer check-writing privileges. One advantage is that there's usually no limit on the number of checks you can write each month. However, any check you write against the account may have to be for at least the required minimum, such as $500. One drawback is that money market funds, unlike money market accounts, are not FDIC insured, although some offer their own insurance. While fund companies try to keep their money market share price stable at $1 a share, there is the possibility you could lose some of your principal.