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Money market accounts are often likened to savings accounts. While they're similar in that they both offer fixed, guaranteed savings and are relatively low in return, the actual way each investment creates that return is different.
Money market deposit accounts create interest by investing in short-term, low-risk securities like treasuries, short-term bonds, CDs, and other relatively conservative investment vehicles. This allows them to offer interest rates that exceed regular savings account rates but that aren't necessarily comparable in terms of growth as other, more aggressive investments. Money market funds can be purchased as vehicles to place within brokerage accounts but are not the same as actual money market deposit accounts.
When you deposit money into a savings account, your bank makes profit by loaning out that money to other customers and charging them interest. They give you a nominal percentage of that interest as your guaranteed savings rate.
Whether you invest in a savings account or a money market deposit account, make sure the institution is FDIC insured so that you're protected against the possible insolvency of your savings institution.
|Jennifer Mathes, Ph.D.|