As an investor, you have many options for where to put your money. One such possibility is a money-market account. Though these accounts have certain benefits, they also have a few key drawbacks.
How money-market accounts work
Money-market accounts work just like regular savings accounts. When you deposit money into a money-market account, you earn interest based on your bank's current rate.
Benefits of money-market accounts
Money-market accounts typically pay a higher rate of interest than regular savings accounts. Furthermore, because they're FDIC-insured for up to $250,000 per depositor (as of 2016), they're a very safe investment, as you don't risk losing any of your principal.
Drawbacks of money-market accounts
Though money-market accounts pay higher interest rates than regular savings accounts, they sometimes require much higher minimum balances than ordinary savings accounts. You might find such an account, for example, with a minimum balance of $10,000 or more.
If you fail to maintain the required minimum balance, you may be charged a monthly service fee, which could exceed the amount of interest you earn, thus negating the benefit of opening the account in the first place. Furthermore, you're usually limited to six withdrawals or transfers per month. Finally, because money-market accounts are considered extremely low risk, they typically generate a much-lower return than other investments like stocks and bonds
Closing a money-market account
Unlike certificates of deposit, which charge a penalty for early withdrawals, you can close a money-market account at any time without incurring a penalty. This makes money-market accounts extremely liquid.
A money-market account is a good place to store your emergency fund, which is money you've saved that's reserved for emergency situations only. Putting your emergency cash in a money-market account allows you to earn some interest on your savings, and because you're free to close the account whenever you like, there's no risk in leaving that cash in a money-market account while you're not using it.
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