
Money market securities are a type of low-risk investment that's often overlooked, but they can be a great option for those looking to earn a steady return on their savings.
They are typically short-term investments, lasting from a few weeks to a few years, and are backed by high-quality assets such as government and corporate bonds, commercial paper, and treasury bills.
One key benefit of money market securities is that they offer liquidity, meaning you can easily access your money when you need it.
Investors can earn interest on their money market securities, which can be a more attractive option than traditional savings accounts that often have low interest rates.
Types of Savings Options
Money market accounts, savings accounts, and CDs are three popular options for growing your savings through interest. A money market account usually offers higher interest rates than a savings account, but lower than a CD.
Here are the key differences between these options:
Each of these options has its own benefits and drawbacks, so it's essential to choose the one that best fits your needs and goals.
Account Types: Savings Options Compared
Savings options can be overwhelming, but understanding the differences between them can help you make informed decisions. A money market account, savings account, and CD are three popular options.
A money market account typically offers higher interest rates than a savings account, but lower than a CD. You can usually withdraw or deposit money from a money market account, but there may be monthly limits on withdrawals.
Savings accounts, on the other hand, usually have the lowest interest rates, but they're often more accessible than money market accounts. You can typically withdraw or deposit money from a savings account without any restrictions.
CDs, or certificates of deposit, usually offer the highest interest rates, but you'll need to keep your money locked in the account for a set period of time, which can range from a few months to several years.
Here's a comparison of the three options:
Jamal, for example, put $60,000 in a one-year CD to earn a 3% interest rate, which earned him another $1,800 for the down payment. He also put $37,000 in a money market account with a 0.5% interest rate, which earned about $185 a year in interest.
Ultimately, the choice between these options depends on your financial goals, risk tolerance, and access needs.
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CD Advantages and Disadvantages
CDs offer a higher rate of return compared to savings or money market accounts. This can be a significant advantage for those looking to grow their savings over time.
CDs can be either short-term or long-term investments, with terms ranging from under 12 months to more than 12 months. This flexibility allows you to choose a term that suits your financial needs.
One of the biggest benefits of CDs is that they are FDIC-insured, which means your deposits are protected up to $250,000. This provides a sense of security and peace of mind.
However, CDs also come with some disadvantages. One of the main drawbacks is that you'll face a penalty for withdrawing your money before the term is up. This can be a significant loss, especially if you need access to your funds sooner rather than later.
Additionally, CDs often require a higher minimum deposit to open an account, which can be a barrier for those who don't have a lot of money to invest. And, once you've deposited your money, it's locked away for the term of the CD, so you won't be able to access it until it matures.
Here's a summary of the key advantages and disadvantages of CDs:
Difference Between Mutual Fund Accounts
A money market mutual fund account is considered an investment, and it's not a savings or checking account, even though some money market funds allow you to write checks.
Mutual funds are offered by brokerage firms and fund companies, and some of those businesses have similar names and could be related to banks and credit unions, but they follow different regulations.
To protect your investment, check if your brokerage firm is registered with the Securities Investor Protection Corporation (SIPC), which provides insurance coverage in case the firm fails.
You can look up your account's FDIC protection by visiting the Electronic Deposit Insurance Estimator or calling the FDIC Call Center at (877) 275-3342.
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Money Market Securities
Money market securities are short-term investments that help you grow your money over time. They're a type of investment that's generally considered low-risk.
A prime money fund is a type of money market security that invests in variable-rate debt and commercial paper of corporations and securities of the US government and agencies.
Government and Treasury money funds are also types of money market securities, but they have stricter requirements. They must invest at least 99.5% of their total assets in cash, government securities, and/or repurchase agreements that are collateralized fully.
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Prime Fund
A prime fund is essentially a type of money fund that invests in variable-rate debt and commercial paper of corporations and the US government.
These investments are typically short-term, with maturities ranging from a few days to a year or so, which helps to minimize risk.
Prime funds can be considered any money fund that is not a Treasury or Tax-exempt fund, giving you a wide range of options to choose from.
They're often used by investors who want to park their money temporarily while still earning a decent return, without taking on too much risk.
Government Funds
Government funds are a type of money market security that invest in low-risk, short-term government securities.
A government money fund invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are collateralized by cash or government securities.
Government money funds are highly liquid and provide a safe haven for investors seeking low-risk returns.
A Treasury fund is a type of government money fund that specifically invests in US Treasury Bills, Bonds, and Notes.
These funds are considered ultra-safe because they invest in securities backed by the full faith and credit of the US government.
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Convenience
Having a money market investment fund linked to your checking account can be incredibly convenient, allowing you to easily access your funds when you need them.
This convenience is a major benefit of money market securities, making it easier to manage your finances and keep your money liquid.
With the ability to link your checking account to an income-yielding money market investment fund, you can make deposits and withdrawals quickly and easily.
This convenience can be a lifesaver during unexpected expenses or financial emergencies, giving you peace of mind knowing you can access your funds when you need them most.
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Sources
- https://www.citizensbank.com/learning/what-is-a-money-market-account.aspx
- https://en.wikipedia.org/wiki/Money_market_fund
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/money-market-funds/
- https://www.citizensbank.com/learning/money-market-account-vs-cd.aspx
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-money-market-account-en-1007/
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