T. Rowe Price Personal Investor - 4 Reasons to Save in a Money Market Fund (2024)

FAQs

Why save in a money market fund? ›

If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.

While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.

Money market funds invest in highly liquid securities like cash, cash equivalents, and high-rated debt-based securities. Because they only invest in highly rated securities, money market funds offer a high degree of safety. Money market funds also offer investors higher yields than traditional savings accounts.

Many accounts have monthly fees

Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.

A money market account is also a deposit account that offers higher interest compared to a traditional savings account, but it also includes some capabilities more commonly found in traditional checking accounts, such as access to your funds via debit card or check.

Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. They may come with the ability to pay bills, write checks and make debit card purchases.

If you insist on holding all your money in money market accounts, no one account should hold more than the FDIC-insured amount of $250,000. It is not uncommon to see families or estates with multiple bank accounts insuring their money as much as possible.

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

Money market funds are usually considered to be safe investments, but it's important to remember that these investments are intended for the short term. With maturities of 13 months or less, the funds stay liquid and allow you better access to your money than longer-term investments.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

Do you pay taxes on money market accounts? ›

The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.

Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.

A money market fund is a mutual fund that invests in short-term debts. Currently, money market funds pay between 4.47% and 4.87% in interest. With that, you can earn between $447 to $487 in interest on $10,000 each year. Certificates of deposit (CDs).

Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners.

A money market account is a financial product offered by banks and credit unions that allows you to safely store your funds while earning some interest. Money market accounts combine some features of checking and savings accounts.

Investing provides the potential for (significantly) higher returns than saving. As your investments grow, they allow you to take advantage of compounding to accelerate gains. Investing offers many different access points and strategies, from individual stocks and bonds to mutual or exchange-traded funds.

MMFs are diversified portfolios of highly liquid assets, while bank deposits are unsecured liabilities on banks' balance sheets. While rate hikes are reflected in the assets held by MMFs (subject to the underlying portfolio positioning), deposit rates are dictated entirely by individual banks.