Along with all of the panicking that’s been going on, one of the primary concerns we’ve been seeing in the industry is that people don’t really understand money market accounts. Within the last month, I’ve had more phone calls from clients wanting to know if their money market accounts are ok with all the ups and downs in the stock market, and it occurs to me that people genuinely don’t realize there is a difference between money market deposit accounts and money market fund accounts.

So, allow me to explain that difference now.

Money Market Deposit Accounts

Money market deposit accounts are held within your financial institution and work like a savings account, with the exception that you can typically write checks off of these accounts. They follow the same regulations as a savings account, i.e. there’s usually a minimum balance and you’re limited to a certain number of withdraws per month, etc.

The difference between the money market and the regular savings is usually the interest that’s earned. The money market account tends to be a higher yield account than a savings, so many people looking to maximize their yields will go for a money market. The key difference between money market deposit accounts and money market fund accounts is that the deposit accounts are FDIC and NCUA insured. That means that each account styling is covered up to $250,000 per the new guidelines of the bailout plan. Any money sitting in a money market deposit account is fully guaranteed up to the limit of the insurance as long as all guidelines have been followed. It is NOT dependent on the stock market, at all.

Money Market Fund Accounts

Money market fund accounts are mutual funds that typically invest in short-term debt instruments. These are regulated by the SEC and the investments made by these accounts are limited to specific criteria such as quality, maturity, and diversity. Money funds typically purchase the highest rated debt, or that which is safest, and scheduled to mature within 13 months. These high-rated, short-term vehicles are meant to help the fluctuation in the account. The account is also limited to 5% investment in any one issuer, with the exception of the U.S. government and repurchase agreement securities – which is a whole other ballgame I don’t get into.

There is some confusion about what is and isn’t protected by investment houses who are SIPC (Securities Investor Protection Corporation) insured. Allow me to explain. They are not like the FDIC or NCUA in that they provide blanket coverage to investors. If you choose to invest, you must be aware that your portfolio could lose value. However, it does offer similar protection as the two aforementioned insurance companies in the event that a brokerage goes belly up. Investors are covered up to $500,000 ($100,000 of which can be cash). What that means is if your brokerage house goes belly up and you have a holding at the end of business day of $300,000 in your brokerage account, you won’t lose that money just because the brokerage house failed.

As you can see, these two types of accounts are extremely different. One is a bank account while the other is an investment account. It is important to understand the difference between the two, particularly now. If you’re not sure, you can talk to your bank to find out, but typically, if it’s held at the bank or credit union and you make regular deposits to it, then it’s probably a money market deposit account and there’s no need to worry about those funds. They are protected.

What are your thoughts on money market accounts? Did you know there was a difference between the two?

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