Investing in Your 20s and 30s: Alternatives to Money Market Mutual Funds

By Eric Tyson

Banks developed an account that is similar to a money market mutual fund, which they typically call a money market deposit account (MMDA). Banks set the interest rate on MMDAs, and historically, those rates have been a bit lower than what you can get from one of the better money market mutual funds (although this has been less true during the extended period of low interest rates during the 2010s). Check writing on MMDAs, if it’s available, may be restricted to a few checks monthly.

As latecomers to the mutual fund business, some banks now offer real money market mutual funds, including tax-free money funds. Again, the better money market mutual funds from mutual fund companies are generally superior to those offered by banks. The reason: Most bank money market funds have higher operating expenses and, hence, lower yields than the best money funds offered by mutual fund companies.

A bank or credit union savings account is sometimes the most practical place to keep your money. Your local bank, for example, may appeal to you if you like being able to conduct business face to face. Perhaps you operate a business where some cash is processed; in this case, you probably can’t beat the convenience and other services that a local bank offers.

If you have only $1,000 or $2,000 to invest, a bank savings account may be your better option; the best money market funds generally require a higher minimum initial investment.

For investing short-term excess cash, you may first want to consider keeping it in your checking account. This option may make financial sense if the extra money helps you avoid monthly service charges because your balance occasionally dips below the minimum. In fact, keeping money in a separate savings account rather than in your checking account may not benefit you if service charges wipe out your interest earnings. This is especially true with interest rates at such relatively low levels.

Be sure to shop around for the best deals on your checking account because minimum balance requirements, service fees, and interest rates vary. Credit unions offer some of the best deals, although they usually don’t offer extensive access to free ATMs. The largest banks with the most ATMs generally don’t have the best terms on checking and savings accounts.