How Do Money Market Accounts Work?

Money market accounts are offered by both banks and credit unions, and are very similar in their behavior to traditional savings accounts. The minimum balance amount tends to be slightly higher than traditional savings accounts and so do the interest rates that are paid on the money on deposit in a money market account. Withdrawal transactions are also limited to an average of 3-6 times a month.If you open a "money market deposit account" through your bank, more than likely you will have the backing of FDIC insurance protection behind you, but you must double check to make sure.

Some money market account basics and how they work:

• Typically, a minimum deposit of $1000 or more is required
• The interest rate paid is generally comparable to to those of a money market mutual fund
• Money market accounts are highly liquid
• Withdrawals are capped and many banks only offer 3 withdrawals a month
• Only accounts officially deemed "money market deposit account" are protected by FDIC insurance

By now, investors have heard the old adage, "don't put all your eggs into one basket," to help mitigate the chance of your financial portfolio value declining. Having a varied assortment of investment options will help you hedge the risks associated with investing into a variety of investment instruments. One such diversification tool you may choose to add to your financial arsenal is investing into a money market account.

If you consider yourself an extremely conservative investor who often puts "safety first" as the number one rule in your investment strategy, a money market account may serve the purpose. In exchange for the level of protection you will receive for the money stored in a money market account, you will be losing the potential to earn the highest return on your investment in the stock market or elsewhere. A good strategy would be using a money market account to diversify your portfolio and ensure that some money is safe, and then diversify some higher-risk instruments to increase your chances of making a healthy return on your investment.