Earn good interest on your money with a money market account. (Photo Credit: CC BY-ND/Catherine Hoyle/Wrights Business Research)

If the rate of return on a small savings account were a particle in the natural world, you’d need an electron microscope to see it. For a better rate of return, consider a money market account. While not as liquid as a savings account – you can’t cash it out as quickly – a money market account is a safe investment that you can easily sign up for online.

Money market accounts and money market funds

There are two basic variations when it comes to a money market: the money market account (aka the money market savings account) and the money market fund (aka the money market mutual fund). Money market accounts are products of a bank, and hence such an investment carries the benefit of being FDIC insured. “High-yield savings,” “Internet savings” and “electronic savings” are all terms various banks will use to refer to such accounts. And like a savings account, a money market savings account provides liquidity, although with some limitations not present in a regular savings account.

Money market mutual funds are quality, short-term investments with some liquidity and interest rates that fluctuate daily. While investors have historically had great success with money market funds in terms of safety, there is no FDIC insurance that guarantees investors will get their money back if the issuing bank becomes insolvent.

Research the best money market account or fund for you

Decide what features work best for your financial situation and shop around. Yields will vary greatly from one financial institution to the next. Check Bankrate.com to compare rates. It is important that consumers pay attention to bait-and-switch-style situations in which a bank advertises a high opening rate, only to drop it down later.

Some banks give customers free checks and access to electronic funds transfer (EFT) between a money market fund and checking account. However, the number of monthly transfers allowed will likely be limited.

If you sign up for a money market account through a brokerage, unlimited check writing, an attached debit card and EFT transfers are common features. Any cash surplus between trades and investments performed within a broker money market account are “swept” into a separate money market account that is used to pay for future trades.

Go to your chosen institution’s website

Once you’re on the website for the financial institution of your choice, the procedure to open an account will be spelled out in detail. Print, sign and mail in the required account agreement, as well as the signature card if the option for checks is available. If you have questions, a toll-free number is made available by most issuing banks. Keep in mind that if signing up for a money market account is difficult with a particular bank, it is likely that future transactions involving the account will also be more trouble than they’re worth.

Don’t forget the EFT

If you want the flexibility to be able to instantly transfer money from your money market account or money market mutual fund into your checking account – and the option is available at your bank of choice – make sure to set up the EFT link at sign-up.

Sources

eHow Money

Investopedia

Cathy Pareto, MBA, CFP, on the benefits of money market accounts

Starting an emergency fund now will help avoid taking on expensive debt in the future. markbarky/Flickr photo.

Not having an emergency fund is why most people end up carrying too much debt. Without an emergency fund, the slightest hiccup in a person’s life can result in debt. A greater disruption can be a total financial disaster. As a rule, people don’t expect the unexpected. And creating an emergency fund is easier said than done. But the nickels and dimes that get wasted every day add up to dollars that can’t be used tomorrow. So perhaps creating an emergency fund is easier than most people think.

Everybody needs an emergency fund eventually

Consider car repair. To emphasize the need for an emergency fund, Brad Chaffee at Enemy of Debt tells a cautionary tale. He was getting new tires for his car at Sears and noticed a woman who faced a big repair bill. She had no extra money, along with bad credit. She couldn’t qualify for a card from Sears, which makes a bundle offering high-interest credit. But the helpful customer service rep found her a card she could qualify for — with a $400 line of credit, a $59 annual fee and a 28 percent APR. Even that card, with its harsh terms, wasn’t enough to help her.

Saving is a bill that must be paid

For people who don’t have an emergency fund, Bankrate says it’s way past time to get serious about creating one. A shaky economic recovery could lapse into a double dip recession. Bankrate recommends stashing three-to-six months in living expenses and emergencies. Taking $50 a month and putting it into a money market account is a good start. Treat the contribution as a bill that must be paid. When the money market account has two months of living expenses, move one month of expenses to a one-month CD. When the CD matures, roll the principal and interest into another one-month CD. Eventually, the emergency fund will have another month of living expenses that can be invested in a two-or three-month CD. Eventually the fund will be able to purchase a six-month CD.

The best stress relief money can buy

Some personal finance basics will help develop an emergency fund. Studenomics recommends paying the emergency fund first before all the other bills. From there, people don’t have to be cheap if they spend money wisely. Especially if they can control their debt (see emergency fund). And there’s nothing wrong with enjoying life. Saving and managing money doesn’t have to be a drag. And best of all, by saving and managing money a person can enjoy life more. An emergency fund is a great stress reliever. Plus, it provides some leeway for dining out, entertainment and a worthwhile family vacation.

Entrance to Bank of New York Building on Wall Street

In the current economy it is more important than ever to keep watch over your savings, mortgage loans, personal loans, CDs, money market accounts and IRAs. It’s imperative to make sure your bank is doing its best to help build security with your investments. More than ever consumers have to be proactive about finding ways to protect their money. Here are some tips to look for when assessing your bank’s service.

Deposit safety

Make sure your bank is FDIC insured. If a bank is insured by the Federal Deposit Insurance Corp that means that your money is guaranteed up to $250,000 per customer. Even if your bank is currently in the midst of stress-testing, the FDIC insurance policy still stands. If you have any questions about whether or not your bank has the coverage, call 877-275-3342 to make sure.

The FDIC insurance applies to saving accounts, checking accounts, money-market accounts, CDs and IRAs. Although the elevated coverage to $250,000 was set to revert back to the previous $100,000 cap, Congress just passed a bill to extend the added coverage until 2013. In addition, credit union deposits are protected by the National Credit Union Share Insurance Fund.

Interest rates

Currently the average money-market interest rate is 0.4%. One way to optimize your interest rate is to do an online search for higher-paying rates. For example, Ally Bank in Utah is offering 2.20% for a 6-month CD or 2.8% for a 12-month commitment. Banking specialist Harry Gruber stated, “It’s takes some research to find better interest rates, but it’s not impossible. A search of the internet can lead you to a variety of out-of-state options where you can invest your savings and maximize your ROI.”

Lending

Another thing to look at when assessing your bank’s effectiveness is to look at their lending standards. Are you a candidate for personal loans if you need one? How easy would it be for you to get a mortgage loan? What about a new car loan? Find out what the lending requirements are for your current institution. Because of the economy, most banks are only lending to customers with a credit score of 730 and up. If you’re score is not in the 700s, now is a great time to start working on it. Get a copy of your free credit report from the three reporting agencies. For a clear picture, visit Smartmoney.com and use their calculators to see how a credit score can alter various payments, both monthly and overall.

Bank fees

Banks that are faltering need to raise cash any way they can and fees are a great tactic they use. Check with your bank to find out how expansive their ATM network is. Limited ATMs mean more fees for you to pay, both from your bank and the bank you use for your transaction. You could switch to a bank with better ATM saturation or join a credit union that has a surcharge-free ATM system. There are also some online banks, such as UFBDirect.com, that will reimburse you up to $4.50 a month for ATM fees.

It’s no longer a secret that banks generate an estimated $17.5 billion dollars annually from overdraft fees. One way to minimize this is to link your checking account to your savings account. If you checking account is too low for a charge, it automatically defaults to your savings account. There will be a transfer fee, but it normally is much lower than a $25 overdraft fee.

Credit card rates

Finally, check to see if your bank has raised your credit card interest rate, lowered your limits or canceled your cards. If any terms have changed on your credit card, call customer service and ask to have your previous agreement reinstated.

If your bank lowered limits on your credit cards that means you have to pay down your balance as soon as possible. You want to avoid damage to your credit score due to a higher debt ratio. Normally it’s acceptable to have 50% of your limit or less charged, without damaging your credit. Slashed limits can put you well below this limit, so be sure to check and alter your charges accordingly.

Your bank

In the end it’s up to consumers to protect their finances. Whatever bank has your savings, check up on its policies to make sure that it is still serving your needs, post-recession. Watch for FDIC insurance, interest rates, lending for mortgage loans and personal loans, the fees your bank charges and what credit card rates they have. These five topics can tell you whether or not you should stay with your current bank, or find a new one.

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