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Can someone explain how money market accounts work?
Advertised interest rates can range from 2% to 5%.
Must be more to it than the amount deposited.

Any response will be appreciated.
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Greetings, Thoughtleader, and welcome. You asked:

Can someone explain how money market accounts work?
Advertised interest rates can range from 2% to 5%.
Must be more to it than the amount deposited.


Money market funds invest in short-term paper that matures in less than a year, and usually in 90 days or less. Of the 1364 money market funds in existence as of 8/31, the greatest year to date return was 4.97%, he lowest 0.13%, and the median return 2.71%. The ones with a higher return obtain it in a couple of ways, and that's by investing in riskier instruments (i.e., higher potential for default) and/or by temporarily waiving all or part of the usual management fee to pump up the short-term return.

That may not be a complete explanation of how these beasts work, but it's the best I can do.

Regards…..Pixy
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Thanks for your reply, Pixy. Doesn't sound much better than passbook savings in my good old credit union.

TL
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>> Thanks for your reply, Pixy. Doesn't sound much better than passbook savings in my good old credit union. <<

If you have a good credit union, money market funds and bank CDs make little sense at current rates. My CU currently has a 5.38% APY on passbook savings...

Tim
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TMFPixy writes:
<<The ones with a higher return obtain it in a couple of ways, and that's by investing in riskier instruments (i.e., higher potential for default) and/or by temporarily waiving all or part of the usual management fee to pump up the short-term return.>>

While I think this is completely true of the ones with the _highest_ returns, I do feel constrained to point out that the ones with the _lowest_ returns aren't necessarily the least risky. I expect that the MMF returns at most banks are so low not because they invest in "The Best Of The Best", but because much of the return on your money is redirected into the bank's revenue stream.

There are a lot of MM funds out there that are returning in the high %4 and low %5 range. In my experience, the larger mutual fund families seem to consistently beat the MMF rates at most banks by %2 or more, and even beat most 6-12 month bank CDs. The only downside is that most have a limit on the smallest check you can write on the account ($100-$500, varying by family), though they generally allow you to write as many checks as you like (most banks seem to restrict you to 3-6).

All that said, if I found a local bank that was consistently comparable (as opposed to promotionally comparable :-), I'd consider using them.

Later,
scott
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MMA's are good alternatives (and should be used instead of) savings accts. You can usually find a good one that pays around 5% as opposed to the less than 2% that savings accts earn. The only thing is usually you have to open with a large amount = $1000 - $2000. This is at least to open it to not get charged any maintenance fees. Check on the minimum balance. A good thing to open is and Asset Builder account which lets you open with at least $50 either from direct deposit from you employer/checking acct. Either way, this is how I have it set up thru T. Rowe Price. You may want to look around, but it's definitely better than your savings.
Good Luck.
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