Money market investing Ask Dr. Don by Jenny C. McCune • Bankrate.com

Dear Dr. Don,
I would like to know if a money market account is a good savings vehicle. I just opened an account and I like that I have access to the money at any time. I can also add money to it. Am I doing the right thing?
Danitza Dollar

Dear Danitza,
Money market accounts and money market mutual funds are a convenient way to hold funds that you want to stay liquid. Money market accounts are a "bank product" and may be FDIC insured, while money market mutual funds are not insured. An earlier Dr. Don column explains the differences in the two accounts in greater detail.

Money market investments are great places to invest your emergency fund or short-term cash needs, but aren't good choices to meet your long-term investing goals.

Your investments need to outpace both taxes and inflation in order to be able to increase your purchasing power over time. Historically, money market investments haven't kept pace with inflation. So once you've built up your emergency fund and have your needs for liquidity met, it's time to look past money market investing.

Investors choose between cash (money market investments), stocks and bonds when investing in financial markets. While the stock market has lost ground over the last three years, and the bond market may be close to its peak, money market investments are a natural choice for investing while waiting for other investment opportunities.

The problem is in trying to time the market, since there's no clear signal when to jump back in to either stocks or bonds. You're better served by taking a broad based approach to investing in all three classes of financial assets.

A great way to earn an inflation-adjusted return on your investments is by investing in Treasury Inflation-Indexed securities (TIPs) or Series I savings bonds. The recent auction of 10-year TIPs had a coupon interest rate of 3 percent and was priced to yield 3.099 percent. On top of that coupon interest rate, the principal balance is adjusted to reflect the inflation rate and coupon interest is paid on the inflation-adjusted principal balance.

You'll owe annual income tax on both the interest income and the inflation adjustment even though you don't receive the inflation adjustment until the note is redeemed or matures. The Series I savings bond also adjusts for inflation, but the current fixed rate component is 2 percent.

Taxes on the interest income and inflation adjustment can be deferred until redemption or maturity with the Series I Savings Bond. You can learn more about both types of inflation-adjusted securities on the Bureau of Public Debt Web site.

Your retirement savings should be in a tax-advantaged account, like a traditional IRA, a Roth IRA or a 401(k) plan. That's especially true if your employer matches all or part of your 401(k) contributions.