Money Market Funds
Hire a pro to invest your emergency fund
For those of you who want to get that little extra from the nest egg you've set aside for emergencies, you can always invest in a money market fund. These invest in short-term, high-quality, U.S. dollar-denominated money market instruments. When comparing funds, it's important to look at the seven-day yield and management expense ratio. A good fund is one that has lower expenses, which leads to higher seven-day yields. If the yield is less than your existing money market account it's definitely not worth considering, especially when you consider that mutual funds, even those sold by banks, are not FDIC (Federal Deposit Insurance Corp.) insured.
What are the benefits of a money market fund?
- As short-term interest rates rise, the seven-day yield will also rise as the money manager adjusts the holdings to reflect the new rates. Banks, on the other hand, control the interest paid on money market accounts. If they choose to keep the annual percentage yield the same, there is very little you can do except try to find a new bank with a better deal.
- Money market funds have greater flexibility, especially when compared to online savings accounts. For instance, your check writing privileges are much more liberal than with money market accounts.
Once you've met the minimum investment requirements of the money market fund, no minimum balance is necessary to receive interest payments. In contrast, the rules for money market accounts clearly stipulate minimum balances must be maintained in order to be eligible to receive the higher rate of interest. Further, many accounts will charge a monthly fee for dropping below this limit.
- Another benefit for those in higher tax brackets is the tax-free fund. If you are going to put half a year's salary aside to sit until an emergency occurs, it's nice to know you can do so and not pay any tax.
Clients of brokerage houses often buy these funds to park money until making another investment. However, with the rising popularity of the emergency fund, investors increasingly are using them to guard against unforeseen events. If you are going to park money for any reason, it makes sense to try to achieve the best rate possible to avoid inflation creep. Using professionals to get you that return is an excellent solution.