Money Markets

[Keyboard Ninja]

Are these an ok alternative to dumping money into a savings account until you figure out what you want to do with it? I'd like to stock pile away some cash before I blow it off on Pringles and beef jerky.

I currently have an ETRADE savings account, but I wasn't sure if Vanguard's Prime Money Market was a better place to stick cash in to try and avoid inflation.

 

[Darryl]

Both good accounts Etrade is currently paying a higher rate and it's FDIC insured. MM is not insured.

 

[Jeremy]

Most money markets are perfectly fine for keeping liquid assets, but you do have to keep in mind that these are not FDIC insured. Also, note that money market funds use a 7-day average yield rather than a typical annual percentage yield you'll see on deposit accounts.

If the fact that it isn't FDIC insured isn't an issue for you, then it is a safe place to put money. Yes, there is the slim chance that one of the issuers could fail to make good on their promise, but a fund like VMMX is heavy in CDs and government deposits, and carry relatively little in the way of commercial paper or anything rated under Aa. Loss of principal is virtually 0.

But for short-term savings that's trying to earn a reasonable yield while you work to find other investments, this is usually a fine strategy. Just keep in mind that if you're comparing something with 10 or 20 basis points more and only plan on keeping the money there for a few months, you'll see almost no benefit.

 

[mickeyd]

If by "Money Markets" you mean money market mutual funds, I believe that they are generally superior to a savings account at a local bank. Sure they are not covered by FDIC, but so what. There has never been a MMF available to the public, that I am aware of, that has not maintained its $1.00 NAV. The Vanguard Prime MMF is an excellent choice if you do not have another in mind.

 

[Jeremy]

There has never been a MMF available to the public, that I am aware of, that has not maintained its $1.00 NAV.

You're exactly right. The only example (that I know of) where a fund's NAV fell below $1 was in 1994 when the Community Bankers U.S. Government MMF was liquidated and investors got back 96 cents on the dollar. It was an institutional fund, so technically, no individual investors likely lost any money.

 

[brewer12345]

There has never been a MMF available to the public, that I am aware of, that has not maintained its $1.00 NAV.

The only retail examples I am aware of were inside of variable annuities when the Fed cut rates to 1%. The expense ratios of the funds were so high that they broke a buck.

 

[ziggy29]

Most money markets are perfectly fine for keeping liquid assets, but you do have to keep in mind that these are not FDIC insured. Also, note that money market funds use a 7-day average yield rather than a typical annual percentage yield you'll see on deposit accounts.

Actually, that's not always true. One of my accounts with USAA has an FDIC-insured money market fund. In recent months it has actually yielded more than their non-insured MMF.

 

[FinanceDude]

The only retail examples I am aware of were inside of variable annuities when the Fed cut rates to 1%. The expense ratios of the funds were so high that they broke a buck.

I didn't know they applied the FULL expense ratio to just the MM portion of the entire asset allocation................

 

[brewer12345]

I didn't know they applied the FULL expense ratio to just the MM portion of the entire asset allocation................

Actually, I think it was just the expense ratio of the underlying money market funds themselves. Other contract fees were on top of that.