Online Money Market Accounts - What to Look for

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Online money market accounts these days should include all of them available to the general public, because every bank or mutual fund family should have a website. They all should allow you to open a new account, and to wire them money or get funds from another bank account.

There are so many choices it's difficult to decide which is best. There are too many variables.

All Good Funds Have Online Money Market Accounts

One thing most people look for is a high yield. All other things being equal, the one with the higher yield is best. However, all other things are never equal, despite what they may seem.

All money market funds must buy up the same kinds of commercial paper. That is, short term loans (around forty to fifty days) made by credit worthy corporations. Therefore, all such notes pay approximately the same rate of interest because there's no reason why one creditworthy corporation borrowing $1,000,000 for fifty days should pay any more interest than another, equally creditworthy, corporation borrowing $1,000,000 for fifty days.

Therefore, you should be suspicious that any money market fund paying more than the general rate is taking on excess risk. They may be investing as much as they're allowed to in higher risk securities, called "Second Tier."

However, it could be that it's run better than the others with a low expense ratio. This is a good thing. In fact, a low expense ratio indicates that fund is positioned to do better than the others in the long run. John C. Bogle, founder of Vanguard, has written about a study which demonstrated that the difference in long term yields of money market funds was almost solely due to differences in management expense ratios. The lower the expense ratio, the more money is left over for shareholders. And even today Vanguard's money market accounts have some of low expense ratios in the business. If I wanted a money market account separate from my bank, I'd use Vanguard.

Other Online Money Market Account Issues

However, you also need to look for other things, such as monthly fees. These are basically another way of charging you for the fund's expenses. They may seem relatively small, but they take money directly out of your pocket, affecting your long term return.

Minimum deposits and required minimum balances. If you have just a small amount of money and you know you'll have to take the account close to zero during every month, then you can't open an account in a fund that will require you keep more money than that, or charge you a fee if you dip below that minimum.

There is also check writing. All money funds have a minimum amount to write a check on. It could be $100 or more. This prevents people from using these funds in place of bank checking accounts. Low checking writing minimums are more convenient, but shouldn't be a deal killer, because you can always deposit larger amounts into your personal checking account to pay your small bills.

However, do be aware that restriction on your account's liquidity and access do cost you a little bit in return.

And of course, you want convenience and good customer service, which all money market accounts should routinely provide.

Finally, don't obsess about it. At today's rates of interest (which show no sign of increasing a lot any time soon), it's not worth spending lots of time worrying about differences in yield which amount only to a few dollars a year (unless you've got a million dollars or more to park in online money market accounts).

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