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Money Market vs. Brokered Money Market

We all save save save and put our money, in the early years, into a savings account that may earn in the ball park of maybe 1% interest. Most of the time this is much less; of course it does depend on your banking institution. We all look at this money as our reserve and "just in case" or "rainy day" money. But, when we all have this thought of putting our money in a safe place, just in case of an emergency, we often don't take the time to consider making our money work for us. The moral of this story is make your money work for you!

We all know what a money market account is right; or maybe we don't... Lets review.

Money Market Accounts 101
A money market account is basically a savings account that has the ability of check writing. These accounts earn more interest than a typical savings account because, with banking institutions, they require a higher daily balance to be maintained. They also earn more interest than a typical checking account because the check writing ability is limited on the number of checks that can be cleared from the account in a given statement cycle (usually 3).

Regulation E also puts a limitation, which is the same for your regular savings account, on how many electronic transfers can be made from the account. This is enforced to help banks meet their reserve requirements, but you're more interested in the interest side of things I suspect.

This account works wonders because the money you have in your savings account is a rainy day fund anyway, so keeping a higher balance shouldn't be a problem; plus these accounts are still FDIC insured; an added bonus. But wait, there's something better!

Brokered Money Marked Accounts
A brokered money market account is a bit different. This account is not FDIC insured because essentially you are investing in stock. Keep in mind it is not like investing in one stock, but this is more like a mutual fund, or investing in many stocks as a form of diversifying.

You are paid interest on your money, usually a lot more than a regular money market account. This is because your money is invested by a fund manager. The fund manager aims to keep the share price of the money market fund of around $1.00. Any earnings that are created from the fund manager are passed on to the investor in the form of interest earnings. Most brokers note that this is an investment and it is possible for it to lose value. However, if you do a bit of reading, chances are the fund's prospectus will show a very stable share price and reasonable return.

Another reason why brokered money market accounts pay more interest is because the yield fluctuates more with a brokered money market. Brokered money market rates are computed every 7 days, verses 30 days with a regular money market rate. Regular money market rates take longer to show changes in the market while brokered money market rates go up and down more readily with the market.

So the main thing to take away is to make sure that your money is earning as much interest as possible so that the rate you are earning is as close to, or above the rate of inflation (historic inflation is about 5%). Why? Because if inflation is 5% and the rate of interest you are earning is 4%, then roughly you are losing 1% of your money's value each year to the effects of inflation.

What is inflation? Inflation, in general terms, is rise in the in the cost of living. So, the amount that a loaf of bread costs is $4 today. Next year that same loaf of bread may cost $4.20 (4 x 1.05). This same concept occurs with everything we consume.

So make your money work for you!

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