This is a guest post by Angie Picardo, she is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy and save money with NerdWallet’s highest money market interest rates and NerdWallet’s no-fee checking accounts. She has written many articles on topics in personal finance including a recent post in US News.

Money Market Accounts

No matter what stage you find yourself in your career, life can often find interesting ways to throw you a curveball. Many of these curveballs are known as Murphy’s Law— anything that can go wrong, will go wrong—and is precisely the reason why individuals of all ages must build and keep an emergency fund.

At the very least, an emergency fund should be between three and six months’ worth of living expenses set aside, untouched, in the event of an unanticipated emergency. In the event of a sudden loss of income, an emergency fund will help those mitigate the sudden financial shock of an individual or household while they clean up the mess and regain momentum. While many people begin an emergency fund by setting aside small amounts of money each month in a savings account, others choose to find accounts that earn a higher rate of interest on their money, such as a certificate of deposits (CD) or money market accounts (MMA).

Emergency Funds through Money Markets

A money market account is nothing more than a financial account that will pay back to the owner an amount of interest that is based on the current interest rate in the money markets. This sort of investment strategy competes with money market funds that are offered by brokerage firm. Instead of simply adding hard cash to a savings account each month to build your emergency fund, money can work harder when placed in a money market account.

While the benefits of MMAs might not be readily visible at first glance, they are often more flexible than CDs. When it comes to writing or depositing checks, ATM accessibility, and the ability to gain access to the account at any time, money market accounts make more sense than a CD for building an emergency fund. While CDs have their own benefits, many have early withdrawal fees if account holders find that they need to access funds before their CD has matured—not an ideal situation in the event of an emergency.

How it Works

Money market mutual funds invest in extremely short term, high quality debt (debt that will most likely be paid back and yield a high return). Because the investment is often for bonds issued by the most stable of debtors—the U.S. government—money market funds can maintain a steady and stable net asset value. This removes much of the risk that can often be found in other types of financial investments.

When account holders open up a money market account, they will often begin earning interest higher than that of a basic savings account. However, the minimum requirement for starting an MMA tends to be higher, ranging from $500 – $10,000. The interest that the account earns is essentially what the bank is paying the account holder for allowing the bank to finance loans to other customers. The bank then makes money by charging a rate of interest on these loans, which also cover everything an account holder has in an MMA – so that funds are available at any time, especially in an emergency.

Choosing an MMA

Choosing an MMA does not have to be a daunting task. Money market accounts are offered at nearly every large financial institution to local and regional banks and credit unions. Nevertheless, there are a few things that should be kept in mind for those shopping around for an MMA:

• Bargain hunt: Like with any product, it is important to do a little research and shop around for the best MMA that is the best fit for the buyer. MMAs can differ in terms of the minimum deposit it takes to open the account, rate of return, and some may have specific restrictions exclusive to the servicing bank or financial institution. These should be well research before opening the account.
• Buy local: If buyers have a brokerage account, it would be worth looking into associated money market accounts with the brokerage. Otherwise, local banks and credit unions will often provide those looking for MMAs with all the information they need in hopes to gain additional business. It’s also a good idea to ensure the account is opened in the area where your emergency is most likely to happen (the same city in which you work or reside, for example).
• Utilizing the free tool at bankrate.com will allow those interested in finding the perfect MMA to compare different accounts from many different banks across the United States. The tool will also sort and list those MMAs that are among the nation’s highest yielding accounts.
• Consider buying online. Sometimes the internet can offer better rates from online banks that do not have the costs associated with managing and maintaining physical locations. While online banks may not be able to offer free ATM services, higher MMA yields can often offset ATM costs if account holders know they will not be using an ATM to access their MMA funds very often.

There is no one perfect MMA offered by any one financial institution. It all comes down to one’s personal financial situation. Nevertheless, due research should be employed when making any serious financial decision, and finding a money market account is no different. With a bit of perseverance and patience, finding an MMA to work at a high capacity should be a stress-free endeavor.

photo credit: BuzzFarmers via photopin cc