Question: Chris — You mentioned money market mutual funds a couple times on last week’s show. Are money market mutual funds the same as money market savings accounts? Can you get them at banks, or just brokerages? Are they still as liquid (make deposits, withdrawals) as money market savings accounts? Thanks — I appreciate all of your and Tess’s advice. Brian, Auburn, AL
Answer: Money market mutual funds and money market savings accounts are similar in many respects, but there are critical differences between the two. A money market savings account at a bank typically pays a higher rate of interest than a regular savings account. The account usually has a higher minimum balance requirement and limitations on the number of withdrawals a month. A money market savings is insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). In other words, if the bank goes belly up, your money is safe (assuming you’re under the insurance limit).
The same isn’t true with a money market mutual fund. There is no FDIC insurance backstopping the account. In return, you’ll get a slightly higher interest rate with the money market mutual fund compared to the money market savings account. Still, money market mutual funds are among the safest investment options available to individual investors. There are two simple ways to reduce risk with a money market mutual fund. First, invest with a brand-name financial institution with the resources to backstop a money market fund if it gets into financial trouble. Second, choose the most conservative fund option. It’s the one that is comprised of mostly short-term U.S. Treasury securities and federal agency debt. There’s no reason to chase higher yields by taking greater risks with this money. You want your principal safe and earn a decent interest rate.