Investing is a great way to have money set aside for retirement and a money market account is a great way to earn some extra interest money on your emergency cash fund. Like any investment you need to consider the security of your investment. Is your investment in a money market account safe? The simple answer is YES. Typically money invested into money market accounts will be safe and protected as most of the companies offering them are backed by the FDIC. However money invested into a money market mutual fund will work a little bit differently.
Chapter 1. Mutual Fund Money Market
When you invest into a mutual fund money market you usually plan on a short-term investment of one year or less. Money market funds will invest into securities like government bonds and treasury bills, both of which will mature in about a year. This is why banks can provide you with a higher money market interest rate as these securities trade in a higher denominations from other investments. Unlike a traditional mutual fund, the money market fund account is not traded publicly. The riskiest of all the securities that money is invested into are the commercial papers. These are issued by large corporations to help finance different aspects of the company like their inventory. To reduce the risk load, banks typically only accept commercial papers from companies that have very high business credit scores. The treasury bills are safe but they usually won’t be able to offer as high of an interest rate as the other securities can offer. Since the securities used by banks are of low-risk, it helps to make investing into a mutual fund money market a very safe investment. The one thing you do need to remember is that a money market fund is not insured by the FDIC. Monitor the fund closely to check for significant drops as it may indicate the fund is taking a large hit and you may need to consider moving to a different fund.
Chapter 2. Money Market Account
The money market accounts used to earn money at a higher interest rate from a savings account are very safe. Check the bank that is issuing the money market account to see if it is secured by the FDIC or not. Some of the highest-paying money market accounts may not be secured by the FDIC as these companies may invest into riskier things to earn more money. The banks that are backed by the FDIC for their money market accounts will typically offer similar interest rates but it is their account fees that can really make the difference. It is important to research the account fees to know what you are paying for and what you options are. Some money market accounts require an initial deposit to open them however most do not ask for anything up front to open the account and you will be able to start earning interest once you do transfer over money from your bank account.
Chapter 3. Know Your Risk
As with any investment you must do your research and find out which accounts will offer you the highest interest rate and will provide you with low risk. Use the Ratecatcher.com comparison chart to see which money market accounts are offering the highest interest rate and which ones charge service fees and other fees to maintain your account.