The question of whether money market accounts are better than savings accounts (and I stretch it, to all kinds of cash accounts) came up in Quora, where I answered it HERE.
But is it such an interesting an overlooked part of planning, I thought I would turn it into an article here on my site.
Are Money Market Accounts Better?
Money market accounts, savings accounts, CDs, savings bonds etc are all potentially good for savings. However, for investing, it may not always be a good idea to keep a high balance in savings accounts. Because, it is true tht all of these instruments offer safety. But that safety comes with a small yield. So if your goals include:
- Emergency fund
- Saving for a house
- Saving for a business
- Cash cushion etc
Then consider these instruments. And if that is the case, now we can discuss some tax differences among various “cash equivalent” options.
It is important to know that certain instruments are taxed differently. For example:
- savings bonds (EE, I) offer tax deferred compound interest growth for up to 30 years. Also the interest earned, because it is federal bond interest, is state tax free. These bonds are guaranteed by the government.
- money market accounts (MMA) are FDIC insured for principal protection, and will pay interest that is taxable at both state and federal level (some states offer local bank tax exemptions). Usually the rate is higher than for savings accounts. (answering your first Q)
- Treasury bills are short term government bonds that offer safety, a decent yield in comparison to other instruments mentioned here, and will pay interest that is free from state taxation.
- Money market funds (MMF) are mutual funds that may invest in CDs, treasury bills etc. Some of the interest paid will be taxable at both state and federal levels and some will be state tax free.
- Treasury only money market funds or short term treasury ETFs – in addition to being safer than your standard MMF, will also pay interest that is state tax free as they can only own treasury bills of various maturities which are state tax free.
How to invest
- Savings accounts, CDs and money market accounts can be bought at your bank or sometimes, for CDs through your broker (Schwab, TD etc all offer).
- Treasury bills, savings bonds and longer dated government bonds can be bought through Treasury Direct: TreasuryDirect – Home
- Money market funds can be bought directly with mutual funds companies or through a brokerage
- Short term treasury ETFs, money market funds and brokered CDs can be bought through a broker.
Hope this helps! Much of this can be done on your own fairly easily – and online. However, If you want to incorporate your cash management into an overall financial plan, weigh the value of having an overall financial plan and maybe spend some time reviewing advisors that might be a good fit for you and try it that way.
Good luck! and if you’re interested in working with Chris, fill out his intake form HERE and we can start the discussion.
Header image credit Gotcredit.com via Flickr.