A safe parking place for emergency money

Question: My wife and I have been putting aside $100 a month and we currently have about $2200.00 in emergency savings. The money is currently in a mutual fund. Is that a good place to keep it or should it be somewhere else? Thanks! Scott, Apex, NC

Answer: I'm assuming when you say "mutual fund" that you mean the money is in a money market mutual fund. I like it that you're putting the money aside every month.

The answer to your question used to be easy: Money market mutual funds were a rewarding parking place for money. That's no longer true.

In general, I'm wary of money market mutual funds, at least for the core amount of your safe savings. For one thing, there is no FDIC insurance with the account. Your money is at risk. For another, the industry pledge that a money market fund's net asset value wouldn't fall below $1-a-share--it wouldn't "break-the-buck" was broken during the credit crunch.

To be sure, most money market mutual funds are safe. Even the money market mutual fund that infamously broke the buck during the crisis lost only 3 cents on the dollar. Problem is, money market mutual funds are not as safe as they could be and industry has yet to back a reform proposal that would truly protect investors during another financial tsunami. .

The simplest thing to do with safe savings/emergency fund is to put it in a federally insured savings account at the bank or credit union. Typically, federally insured online-only savings accounts pay the best rates--which isn't saying much today--since online banks are aren't carrying brick-and-mortar branch office expenses.

If you do want to keep money in a money market mutual fund, I would pick the most conservative money market mutual fund option, one that invests primarily in U.S. Treasury bills and short-term investment grade corporate debt. The price for this kind of fund is a very low yield. At the same time, I would only invest in a money market mutual fund at a brand-name institution with the financial resources to back its money funds in a pinch.

About the author

Chris Farrell is the economics editor of Marketplace Money.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...