Monthly vs. Quarterly Money Market Accounts

A money market account is a somewhat racier version of a bank or credit union savings account. Like a savings account, the money you deposit in an MMA collects interest and is insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. MMAs normally pay more interest than regular savings accounts, but they also impose certain restrictions.

MMAs normally earn interest daily. A monthly MMA deposits your accrued interest monthly, while a quarterly account pays the interest every three months. The difference between the two payment schedules is the rate of compounding, which is the payment of interest on interest. Accounts that compound monthly grow faster than those that compound quarterly, because your interest starts earning interest sooner. Savers who use MMAs that compound daily normally experience the highest yearly returns.

You may have to pony up a small fortune to open an MMA -- some banks require a $10,000 initial deposit. MMAs normally restrict the number of checks you can write on the account and the number of withdrawals you can make during the month. Unlike a certificate of deposit, you can add money to your account at any time. Don't confuse MMAs with money market mutual funds, which are often attached to a brokerage account. The Securities Investor Protection Corporation insures MMFs. You can earn tax-free interest from MMFs that specialize in municipal bonds.

The "money market" is a collection of banks, traders, exchanges and computers that buy and sell "instruments" such as short-term Treasury bills, certificates of deposit and commercial paper. Money market instruments are normally quite safe and highly liquid -- traders can sell easily without reducing an instrument's value. The market normally rewards investors who take risks, so the yield on MMAs is usually at the low end of the spectrum. As of mid-2013, the average MMA was paying an annual percentage yield of 0.44 percent, according to Bankrate.com.

The high liquidity and safety of an MMA makes it suitable as a part of just about any investment portfolio. However, the price for these virtues is a puny yield that is below the inflation rate. In other words, an MMA normally provides a negative real return. To protect your portfolio from the ravages of inflation, you might invest in stocks, bonds and other assets, but these are neither insured nor immune to losses.

If you require safe savings that are protected from inflation, you might consider U.S. Treasury Series I savings bonds or Treasury inflation-protected securities, which promise a return indexed to the inflation rate, as measured by the Consumer Price Index. However, neither is as liquid as an MMA.