Setting aside money for savings is often can be difficult thing because you have to sacrifice spending on other things. When you limit your fun spending to set aside savings, you want to feel sure that money is safe. Your choices start with an FDIC-insured savings account, but there are other investments available to most individual investors that are also considered safe, including certificates of deposit, U.S. Treasury bills, money market mutual funds and bank money market accounts.
Money Market Investments
Money market securities have short maturities, typically less than one year. As long as they are insured by the FDIC, are obligations of the Federal government or some other highly rated issuer that is not likely to default on payment at maturity, the investment is considered safe. Types of money market securities include bank certificates of deposit, banker's acceptances, commercial paper and U.S. Treasury bills. Some have high minimum investments and are purchased by institutional investors, including money market mutual funds. When you deposit to a money market account or fund, you are investing in a pool of these securities. You can choose money funds that invest in only government-guaranteed securities, or other types that buy investments that are less secure, but still considered safe, such as commercial paper and banker's acceptances for the higher yield they may provide.
Money market investments are places where you accumulate money or park your investment cash between stock or bond transactions. Bank MMAs and money market mutual funds are liquid, meaning you can add or withdraw money the same day. Individual investments in bank CDs and T-bills may not have same-day settlement, depending on the policies of the bank or brokerage firm handling your transaction, so they may not be appropriate if you need instant access such as that provided by money market mutual funds and bank MMAs.
Safety and instant availability of cash are the two top benefits of a money market fund or bank MMA. During periods of rising interest rates, money market funds and many bank MMAs daily change their interest rates so interest paid on investments in these accounts tends to follow the market rates up. That makes them good places to accumulate and park your money while waiting for an opportunity to buy bonds when interest rates peak. Some funds are managed to provide higher yield due to investment in slightly riskier, but still safe, securities. The professional investment managers who manage money market mutual funds seek to keep the net asset value -- the price you at which you buy or sell the fund -- stable, at $1. Many MMAs and money market mutual funds have check-writing privileges or debit cards for instant access to your money and are available at your bank or brokerage firm and sometimes through your insurance provider.
During the credit crisis of 2008, some money market mutual funds "broke the dollar." This means their net asset values declined to below $1 because of the bankruptcy of certain of their investments previously considered safe, such as Lehman Brothers securities. Those who withdrew money at that time lost a small percentage of their investments. In bank MMAs, your withdrawals are limited to six per month or your money will be moved to a non-interest account. Ask if your investment in an MMA is insured by the FDIC before depositing, as limits on FDIC insurance change, and what you think is an MMA actually may be a money market mutual fund, which is not insured. Money-market mutual funds are not guaranteed by the U.S. government or insured by the FDIC, though they do invest in bank CDs and government securities. If you have your money in a brokerage firm, SIPC will protect the assets in your account in the event the brokerage firm goes out of business but it will not guarantee against loss of money in any of your investments, even a money market mutual fund. Money market investments pay lower interest rates than longer-term, safe investments such as U.S. Treasury bonds, and if interest rates are declining, their daily interest rates will decline, too. Fees are another problem. During periods of very low interest rates, the management fees and transaction fees charged by money market funds can be higher than the interest paid on the account.
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