Money Market Accounts, Money Market Funds and Brokerage Cash

"Money market" is the most confusing name in personal finance, because it covers two different things: a bank account that is insured, and an investment fund that is not. Add the cash sitting in a brokerage account, which is quietly placed somewhere on your behalf, and the "cash management accounts" that bundle all of it together, and it is easy to hold money in a place you never chose at a rate you never checked. This chapter separates them, shows what each one costs and protects, and explains the default setting that costs brokerage customers the most.

Money market accounts: a savings account with extras

A money market account is a bank deposit. It is insured by the FDIC (or the NCUA at a credit union) exactly like a savings account, up to $250,000 per depositor, per bank, per ownership category. The difference is in the features. Many come with checks or a debit card, which makes them handy for paying a large bill straight from the reserve. In exchange, some require a higher minimum balance or pay tiered rates that rise with the balance.

Do not assume a money market account pays more than a savings account. At many banks, the online savings account pays the same or more. Compare the APY on the balance you will actually keep, check the minimum needed to avoid a monthly fee, and decide whether check-writing is worth anything to you. If you rarely pay anything directly from savings, it probably is not.

Money market funds: a fund, not a deposit

A money market fund is a mutual fund. It buys very short-term debt, such as Treasury bills, repurchase agreements backed by Treasuries, and short-term corporate or municipal notes, and passes the interest to shareholders after its expenses. It is regulated by the Securities and Exchange Commission under Rule 2a-7, which limits what it can hold, how long that debt can run, and how much it must keep in assets it can sell within a day or a week.

Most funds aim to keep a stable share price of one dollar, so the balance behaves like cash and the interest arrives as new shares. That stable price is a goal, not a guarantee. A money market fund is not FDIC-insured. In September 2008 a large fund, the Reserve Primary Fund, "broke the buck" when the commercial paper it held lost value, and its investors waited months to get back slightly less than they put in. Rules were tightened after that and again in 2023, when the SEC removed funds' ability to suspend redemptions and required institutional prime and tax-exempt funds to charge a fee on days of heavy redemptions.

Funds come in a few types, and the type decides the risk and the tax:

• Government funds keep at least 99.5% of their assets in cash, government securities and repurchase agreements backed by them. This is the type most brokerages use as a default, and the closest a fund gets to the safety of a Treasury bill.
• Treasury funds are government funds that hold mainly Treasury securities. Interest from Treasuries is exempt from state and local income tax, and many states let you exclude the share of a fund's dividends that came from them. Chapter 6 explains how much that can be worth.
• Prime funds also hold short-term corporate debt. They usually pay a little more, with a little more credit risk.
• Municipal (tax-exempt) funds hold short-term state and local government debt, whose interest is generally free of federal income tax. Chapter 6 shows when that beats a taxable yield.

A fund's yield is usually quoted as the 7-day SEC yield, which is already net of the fund's expenses. Expenses still matter when you choose between two funds holding similar assets, because they come straight out of your yield every year:

If the fund's holdings earn 4.2% before costs, a fund charging 0.1% a year leaves $61,126 after 5 years, and one charging 0.5% leaves $59,960. The difference, $1,165, is the price of the higher expense ratio for funds that hold essentially the same thing. The investment fee calculator runs it for your own balance.

One practical point: selling fund shares at a brokerage normally settles in one business day, and then you still have to transfer the money to your bank. Plan on two to three business days from decision to cash in checking.

Brokerage cash: the default you did not choose

Any cash that sits uninvested in a brokerage account, from a deposit, a dividend or a sale, goes into the firm's sweep program automatically. There are two kinds:

• A bank sweep places the cash in deposit accounts at one or more partner banks. It is FDIC-insured at the bank level, often spread over several banks so the coverage can exceed the single-bank limit.
• A money market sweep buys shares of one of the firm's money market funds.

The problem is the rate. At many brokerages the default bank sweep pays far less than the same firm's own money market funds, because the firm earns the difference. Low default sweep rates have drawn public criticism and regulatory attention, but the setting is still common, and many customers never look at it.

The same $30,000 earns $150 in the default sweep and $1,200 in a money market fund at the same firm. Fixing it usually takes two minutes: buy the fund with the idle cash, or change the account's sweep setting if the firm lets you choose a fund as the default.

Cash management accounts

A cash management account is a brokerage or fintech account that behaves like checking and savings combined: a debit card, bill pay, direct deposit, often ATM fee refunds, and a rate that is usually competitive. Under the surface it is a bank sweep. Your money is spread across a list of program banks, which is how these accounts advertise insurance well above the single-bank limit.

Three questions decide whether one fits:

1. Which banks hold the money? The program list is published. If you already have deposits at one of those banks, the two count toward one limit there; most programs let you exclude a bank.
2. Who is the account with? A brokerage member of the Securities Investor Protection Corporation (SIPC) protects you if the brokerage fails and your assets are missing, which is a different protection from FDIC insurance and does not cover a fall in value. A fintech app that is neither a bank nor a broker adds the risk described in chapter 2.
3. Is the convenience worth it? Having spending, savings and investing in one place makes moving money fast and keeps the picture simple. It also means one login, one company and one point of failure for most of your money.

Which one for which job

For the safety reserve, any of the insured options or a government fund works; the choice comes down to rate and how you like to move money. For cash waiting to be invested, a money market fund inside the brokerage is usually simplest.