If you are looking for a safe place to keep cash while earning more than a basic savings account, you have probably come across two products with nearly the same name: money market accounts and money market funds. They are often mentioned together, and both are used to hold short-term money. However, they are very different products, offered by different kinds of institutions and protected in different ways. Understanding the difference helps you choose the right home for your emergency fund, house down payment or other short-term savings.
What a money market account is
A money market account is a deposit account offered by a bank or credit union. It works much like a savings account, but it often pays a higher interest rate and may come with limited check-writing or a debit card. Because it is a deposit, a money market account at an FDIC-insured bank is covered up to $250,000 per depositor, per bank, for each ownership category. Credit union accounts receive similar protection through the NCUA. Your balance does not go up or down with the markets.
The trade-offs are usually minimum balances and rate differences. Some banks require a minimum opening deposit or charge a monthly fee if your balance drops below a set amount. The interest rate is set by the bank and can change at any time, and many traditional banks pay far less than online banks. Shopping around matters, because the rate on two money market accounts can differ by several percentage points.
What a money market fund is
A money market fund is a type of mutual fund that you buy through a brokerage or investment account. The fund pools money from many investors and buys very short-term, high-quality debt, such as U.S. Treasury bills, government agency securities and short-term corporate paper. Most money market funds aim to keep a stable share price of $1.00, and the interest earned by the fund is paid to you as dividends, usually each month.
The important difference is protection. Money market funds are not bank deposits and are not FDIC insured. They are regulated by the Securities and Exchange Commission and have strict rules on what they can hold, which has made them very stable historically. Still, it is possible, though rare, for a fund to fall below $1.00 per share. Government money market funds, which hold mainly Treasury and agency securities, are generally considered the most conservative choice.
Comparing yields, access and taxes
Money market funds often pay yields that closely track current short-term interest rates, which can make them more competitive than many bank accounts when rates are high. Money market accounts can be easier to access for everyday spending, since money moves directly within your bank. Taxes can differ too. Interest from a bank account is fully taxable at the federal and state level, while some Treasury-focused funds pay income that is exempt from state income tax, which can matter if you live in a high-tax state.
Which one is right for your cash
For an emergency fund that you may need to tap quickly, many people prefer the simplicity and FDIC protection of a high-yield money market account. For larger cash balances that sit alongside your investments, such as money waiting to be invested or saved for a goal a year or two away, a money market fund inside a brokerage account can be a practical option. Some households use both: an account at the bank for near-term needs and a fund in their investment account for everything else.
Putting your cash to work
Whichever you choose, the biggest mistake is leaving large balances in a checking account that pays almost nothing. Compare current yields, fees, minimums and protections before you move money, and check how quickly you can access it. If you are not sure how much cash to keep on hand or where it should live, a Cash Fund Orbits advisor can review your savings, upcoming goals and tax situation and help you build a cash plan that fits.
