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If you don't have a large amount of cash - let's say $1,000 or more - moldering away in a savings account, then this article may not interest you. If you do, you may be wondering whether a savings account is the best place to keep it. Sure, it's liquid, but the interest rates are only slightly better than those offered by your sock drawer and may be only slightly better than the inflation rate. One alternative is a money market mutual fund. In this article we will compare and contrast money market mutual fund accounts with savings accounts. (For more on this, read Money Market Mutual Funds.)
Security
The main reason people use banks to hold their money isn't because of the lucrative returns from interest rates - it is because the bricks, sensors and a tempered steel safe convey a sense of security that a sock drawer can't match. On top of the physical security of a bank, there is the protection of the U.S. government. The Federal Deposit Insurance Corporation guarantees that the bank will not lose your money. The limit for this coverage applies for up to $100,000 per account. (To read more, see Are Your Bank Deposits Insured?)On the other hand, money market mutual funds are safe in a different way. There is no backing from the federal government, but the SEC carefully hems in money market funds. They generally only invest in financially reliable securities and all the investments must have an average maturity of less than 120 days. This results in a lot of government issues (municipal, state, federal) - which are the safest debt instruments - that have a lower yield than the average market, but a better rate than your savings account. Fees
For savings accounts, the two biggest fees are associated with a minimum balance requirement and transaction fees. Depending on the bank and the exact savings account, these fees vary but they are usually not a problem for those with a large amount of money in a savings account.For money market funds, there are several fees that investors should be aware of when contemplating an investment in this type of asset. The biggest is the expense ratio, which is percent charged on the fund for management expenses. For these types of funds they will typically be very low, usually below 0.5%. Also, there may be balance requirements or transaction fees so make sure to carefully look over the fees associated with an investment with any fund you consider.
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