Should I Put My Savings in A Money Market Fund?
/Idle cash can bring the benefit of a safety net and the headache of feeling like your money’s not growing. We often hear clients concerned that they’ve stashed away money over the years but haven’t really seen any growth. Usually, this means they’ve put their savings into a safe place, like a savings account at a bank, but they’re not earning much, if any, interest on the funds. We’ve been in a historically low interest rate environment for over a decade now, so finding a safe place to stash your cash that actually earns a decent rate of interest has been difficult.
Dependent on what your plans are for the cash you’ve been saving and your tolerance for risk, keeping cash in a money market mutual fund may be a good alternative to a savings account. A money market mutual fund is an investment that typically pays more than the default cash options at most brokerage firms. Keep in mind, because it is an investment, it is not guaranteed against loss. Money market mutual funds are also not as liquid as keeping funds in cash because they trade like any other mutual fund. This means when you need cash, you’ll need to sell shares of the fund, then wait one business day for the trade to settle before your cash is available. These investments trade at $1.00 per share and the monthly interest payments are automatically reinvested in the fund for compound returns.
There are three different types of money market mutual funds; prime, government, and tax-free. A prime money market fund is typically invested in extremely short-term corporate or bank debt securities. Government money market funds are invested primarily in government-backed securities, usually making them the safest option. A tax-free money market fund is usually invested in debt obligations that are issued by municipalities, so the interest will be federally tax-exempt. There are even some of these municipal funds concentrated in states with high tax rates (like California, New York, New Jersey, and Massachusetts) that will offer federal and state tax-free income for residents of those states.
For those who may not need to use their cash right away, but still want to keep it relatively safe, a money market mutual fund can be a good option for investment. If you’re not sure if it’s right for you, ask your Certified Financial Planner™ professional for their opinion.
- Margaret Gooley, CFP®, Worley Erhart-Graves Financial Advisors
