Let’s move on to Brian H’s question. He mentions an article he recently read that highlights the difference between a money market account at a bank and a money market fund at a brokerage. We discussed this topic on our previous SVB show. Are both options suitable for an emergency fund? Great!
Brian’s question revolves around the confusion caused by the one-word difference between “money market account” and “money market fund.” That one word can make a significant difference. When people talk about cash savings and high-yield savings accounts, they often refer to opening a high-yield savings account listed on websites like bankrate.com. In most cases, these high-yield options are money market accounts. They offer readily available cash that is fully liquid. Some well-known examples are Capital One, Marcus, and Ally. These accounts are covered by FDIC insurance, provided the bank is an FDIC member. You can verify a bank’s FDIC membership at fdic.gov. With an FDIC-insured money market account, your cash deposits are protected by the federal government’s full faith and credit, up to insurable limits. The limit is $250,000 for single depositors and $500,000 for joint depositors.
Now, let’s discuss the other investment option that has gained popularity with rising interest rates. I apologize for my previous error; the correct website to check FDIC membership is indeed fdic.gov. Money market mutual funds are investment vehicles or mutual funds that invest in cash and cash equivalents. Cash equivalents include short-term government debt issues, treasury bills, and certificates of deposit. Since they are investment accounts, they can potentially yield slightly higher returns. However, it’s important to note that money market mutual funds are subject to potential loss of principal, although reputable companies like Fidelity, Vanguard, and Schwab work diligently to mitigate risks. You can examine the composition of the specific money market mutual fund you hold to assess its liquidity. Reputable funds generally hold a significant portion of fixed income dated less than 30 days, ensuring liquidity. While money market mutual funds strive to maintain a stable value of $1 per share, significant market events can cause fluctuations. Nonetheless, these funds aim to be as secure and stable as money market accounts.
To clarify, money market accounts and money market mutual funds are not covered by the same insurance. Money market accounts are FDIC-insured, while money market mutual funds are protected by SIPC insurance. SIPC provides coverage against malfeasance or fraud by the investment company, such as Fidelity, for up to $500,000 of security value. However, large brokerages often acquire additional SIPC coverage to offer their customers more protection, especially for accounts holding millions of dollars. Therefore, both money market accounts and money market mutual funds are acceptable choices for parking your emergency reserves, but it’s crucial to understand their differences and associated risks. Personally, I employ a two-account system: a high-yield money market mutual fund for my emergency fund and a traditional brick-and-mortar checking account for day-to-day transactions. I maintain a link between the two accounts for easy transfers, which works well for me.
Remember to approach these options with full awareness of the risks involved and ensure your comfort level before allocating your funds. Either choice can serve as a suitable holding place for emergency reserves. For more information, check out our free resources here.