This week I met a wonderful person at one of the Free Financial Peace University lessons I hosted this week. She was curious about Money Market accounts. This post is a direct answer to her question.
I recommend you keep your $1,000.00 beginner emergency fund (Baby Step #1) at your bank, even if it doesn’t make any interest. But the fully-funded emergency fund (Baby Step #3) can be put somewhere a little better, a Money Market account. This is not an investment, it is only a place to park the money for those really big emergencies should only happen on rare occasions. There are three main reasons to use a Money Market account instead of other savings vehicles like CDs or Savings Bonds:
1) The money is still liquid, meaning you can get the money out in just one or two business days.
2) There are no fees or penalties for taking the money out.
3) It pays better than regular savings accounts.
Where do you find good Money Market Accounts?
You can find Money Market accounts in local banks, but I have found they either pay lower rates or it takes quite a bit of money to open the account. For instance, the Money Market account she was researching offered a 1.10% annual rate with FDIC insurance but required a $10,000.00 opening deposit.
My family personally uses an online Money Market account. Two of the most popular are Emigrant Direct and ING Direct (now Capitol One 360). They offer competitive interest rates with FDIC insurance and no minimum opening amount required. There are no fees to open the account or penalties to take your money back out. Opening the account is easy, easier than getting a cell phone or getting your annual credit report and can be done in minutes. Simply transfer money to or from your bank’s account. The only restriction is that it takes one or two business days for the transfer to complete.
Saving money is important. Being prepared for an unfortunate accident, layoff, or unspeakable event is the responsible and mature thing to do. But that doesn’t mean you should be able to earn a little bit of money while you wait.