You know you need to sock away some money for the future, but with the dizzying array of financial products on the market it can be challenging to figure out where to put your hard-earned dollars where they will be safe. Bank accounts are among the safest places for your money thanks to FDIC insurance, but the interest rates they offer are tiny. Mutual funds can offer a substantially higher rate of return, but they also involve a higher level of risk. For the greatest combination of safety with higher rates of return, you might consider putting your savings dollars in a stable value fund or a money market fund or account.
Money Market Account
A money market account is a special type of bank account. All of your funds in a money market account -- assuming it is offered by a bank that is a member of the Federal Deposit Insurance Corporation -- are 100 percent insured up to the maximum legal limit of $250,000. The interest offered on bank money market accounts is set by the bank and is typically somewhat higher than the rates offered on regular savings accounts. You get the added benefit of instant access to your funds without an early withdrawal penalty, but there are usually limits on the number of withdrawals you can make from your money market account in a specified period of time.
Money Market Fund
A money market fund is a special type of mutual fund. These funds are regulated by federal law and are allowed to only invest in certain types of low-risk securities, such as government debt; FDIC-insured certificates of deposit; and high-grade, short-term commercial paper issued by major U.S.-based corporations. Because of this requirement, the U.S. Securities and Exchange Commission considers money market funds to be low-risk investments. Shares of money market funds are usually maintained at $1 per share, and they typically pay higher interest rates than bank money market accounts. Although they are low-risk investments, money market funds are not insured by the FDIC or any other government institution, even if securities held by the fund are insured.
Stable Value Fund
A stable value fund is a mutual fund that has an investment objective of maintaining the value of its investments at a stable level, but with a secondary objective of returning a higher rate of earnings than money market funds. Stable value funds are not restricted by law from investing in higher risk investments, but they tend to be conservatively managed and are commonly used for qualified retirement accounts. These funds include a diversified portfolio of investments to reduce risk and often enter into contracts with financial institutions, such as insurance companies or banks, to protect their portfolios from radical gains or losses caused by interest rate fluctuations.
You should assess your current financial situation and determine your future financial goals before you make any kind of investment. Put any money that needs to be absolutely safe, but accessible, into an FDIC-insured money market account. If you are comfortable with a slightly higher level of risk, you can often get a better rate of return by investing in a money market mutual fund. Stable value funds can offer you an even better total return on your investment, in a low-risk environment, provided you are prepared to leave these funds alone for the long term.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.