Money Market Accounts vs Money Market Funds Comparison for Kids and Teens
This video performs a money market accounts vs money market funds comparison in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about money market accounts and funds, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a money market account
- What is a money market fund
- Money market accounts vs money market funds: The differences
- Money market accounts vs money market funds: Which one should you choose
What is a money market account?
A money market account or MMA is an interest-paying account offered by banks and credit unions.
It combines the benefits of both savings and checking accounts, by offering the earning potential of a savings account along with the flexibility and convenience of a checking account.
What is a money market fund?
A money market fund or MMF, also called a money market mutual fund, is a type of fixed income mutual fund.
It invests in very low-risk, highly liquid, short-term debt securities like government bonds, municipal bonds and investment grade corporate bonds, as well as cash and cash equivalents like Certificate of Deposit (CD).
It also pays some interest, which could be taxable or tax-exempt depending on its portfolio.
Money Market Accounts vs Money Market Funds
They sound very similar. How are they different?
While they are both very low risk avenues to park cash safely for the short term, there are some key differences.
A money market account is a deposit account whereas a money market fund is a type of investment product. Because MMA is a type of bank account, it is insured by the FDIC up to $250,000.
This means your money is absolutely safe even if the bank goes bankrupt.
MMF on the other hand is a type of mutual fund and comes with no such guarantee.
While MMF is one of the safest investments, there is always a risk of losing your principal. Even if you don’t lose your entire investment, the price fluctuations of MMFs mean that you might end up with less than what you invested.
Another major difference is regarding the fees charged.
Money market accounts usually charge fees for going below the minimum balance or for exceeding the number of permitted transactions. So these fees can be avoided as long as the customer meets the requirements.
On the other hand, money market funds are actively managed and the fees charged by them are for managing the account. Although these fees vary by provider, they are usually unavoidable, and eat into your returns.
Money Market Accounts vs Money Market Funds: Which one should I choose?
If you are completely risk-averse, can take absolutely no chances with your money, and are comfortable maintaining the minimum balance, a money market account would be a good choice.
That said, since money market funds invest in very safe, highly liquid securities, the risk of losing your investment is very minimal.
So you can opt for MMFs if their returns are significantly higher.