Money market ACCOUNTS are paying 4.25%. Money Market FUNDS are paying 5.40%.
Besides the rate, what’s the difference and which should you use?
Let’s keep it simple and digestible.
MONEY MARKET ACCOUNTS
Money market accounts are a type of savings account at a bank.
They are FDIC-insured up to the $250k limit.
The cash is fully liquid and available for withdrawal at any point just like your checking account.
MONEY MARKET FUNDS
Money market funds are mutual funds invested in very short-term investments.
They are NOT FDIC-insured.
The cash is NOT fully liquid because the fund needs to be sold just like any other mutual fund or ETF. So you can’t access the cash for 2 days
HOW RISKY ARE MONEY MARKET FUNDS?
The risk associated with money market funds is called “breaking the buck.”
In other words, the risk that the $1 you invest is worth less than a $1 at any point.
Since their introduction in 1971, there have been two times that happened.
The first one was in 1994 when a fund was liquidated at 96 cents on the dollar due to investing in derivatives.
The second time was in 2008 when a money market fund was invested in Lehman Brothers commercial paper. While the fund didn’t liquidate, it WAS worth less than $1 for 2 days. (I actually lived through this one.)
Since 2008 regulations have since been put in place to further reduce the risk of that ever happening again.
WHICH IS BETTER? YOU DO YOU!
There is no right or wrong answer. It just depends how you’re wired
Personally, my cash is in a money market fund, but I’m wired with a high risk tolerance.
Some people who are more conservative will sleep better with Uncle Sam watching over them and that’s fine too.
This is not intended as a recommendation of any sort.
The only recommendation I WILL make is to make it a conscious decision.
The rules of the game have changed.
Make sure you update your mental map even if it ultimately leads you to the same destination.
