In today's financial world, understanding the myriad of ways to protect and grow your wealth is very important. Let's take a look at some instruments which is great for protecting money you already have. Savings is an excellent way to let your current money be reinvested in small businesses that grow the economy. For those who have substantial cash that they would like to protect, Money Market Accounts can be a great type of savings account to put your money to work for the economy. Also, for the more advanced investor who can handle more risk, a Money Market Fund is an excellent way to invest your money short term through a brokerage firm. Both of these instruments will usually generate a much higher yield than a vanilla savings account, however allow you access to your money through a much shorter window than many other investment types. For those wealth protectors who would like to see their money grow without having to face steep penalties for using it down the road, these classes of investment serve as great options to meet your needs of flexibility, great returns, and security.
Money Market Accounts are a type of savings account, which are provided by your bank or credit union, which typically offers a higher interest rate than a traditional savings account. In exchange for this higher interest rate, you must keep a higher minimum balance, and can only withdraw a limited amount of times per month. Money Market Accounts, however, will allow you to write a specific number of checks per month. This makes for more flexibility with your money in savings. Since this is a traditional bank account, it is insured by the F.D.I.C.(Federal Deposit Insurance Corporation), who now insures all accounts up to 250,000$. This means that in the event that the bank itself collapses, your money would be protected by this guarantee.
The Money Market Account is perfect for the savvy investor who has more cash to play with than would be sensible in a standard Savings Account. The minimum balance requirement will vary, but typically will be over 1000$. However, the additional flexibility offered by the allowed withdrawals and the ability to write some checks, makes it more desirable than a Certificate of Deposit for those who might have an unexpected need for some of the cash at some point in the future.
This type of account will pay a nice Annual Yield while keeping your money safe. The safety comes in its classification as a Savings Account, which is the reason that you are only allowed a limited number of transactions at a time. Using the authority of Regulation Q, ushered in during the Glass-Steagall Act, banks are allowed to classify these accounts in this way. Many Money Market accounts will even allow you to use a debit card for withdrawals.
A money market account determines the interest rate based on the returns the bank believes it will be able to accrue from loaning the money in your account. These rates will yield higher than a savings account, but will be lower than a Certificate of Deposit because they can be withdrawn at any time. In accordance with Federal regulation, your money will be invested primarily in deposit instruments from other financial institutions, federal agencies or municipalities, and US Treasury bonds. They method of handling of your account affects the way in which it accrues interest. The account may be tiered or blended. A tiered account will allow you to reach the optimal interest rate when your money has reached the minimum balance associated with that rate. A blended account will offer different returns on different parts of your investment. Calculating interest also affects the returns you get on your account. Compound interest will allow you to earn interest on top of the interest you have already earned. A day-of-deposit to day-of-withdrawal method will allow all of your money to earn interest every day that it remains in the bank. Another method is the Average Daily Balance. This process evaluates interest based on the average daily balance for the billing period.
Another option which is good for the investor with some cash on hand, is a Money Market Fund. A money market fund differs from a Money Market Account in the sense that the money is invested as assets held by a brokerage on behalf of the investor. This is not technically filed as a bank account, so it does not enjoy the same F.D.I.C. protections as a Money Market Account. Although these types of arrangements involve more risk, they typically grant higher yields as they are invested short term, typically with stronger and more stable positions. The Money Market Fund is regulated by the Securities and Exchange Commission. The fund itself must buy the highest rated debt over a short window(around one year), and will typically focus on securities such as repurchase agreements, short-term government bonds, commercial paper, and certificates of deposit. This allows you to do some investing across the scope of the economy, while taking part only in the least risky investments which are giving out a great short term yield.
Over the long history of Money Market Funds, most of the time they have been very safe. The fund managers seek to maintain a 1.00$ Net Asset Value, and when a fund does not, it "broke the buck". These funds do not generally yield the same level of returns that the generally stock market might yield, however, they are great for a short term investment when you might need the money back much sooner. A Money Market Fund can receive its complete principle and interest within 397 days. The average maturity of the fund must be reached within 90 days, by government regulation, though many will be able to reach it much sooner. Money Market Fund's are currently guaranteed to the 1.00$ Net Asset Value by the U.S. Department of the Treasury until April 30, 2009.
Maintaining the 1.00$ Net Asset Value is a complex process. Money Market Accounts are regulated by the U.S. Securities and Exchange Commission under Rule 2a-7 under the Investment Company Act of 1940. This rule governs the maturity, credit quality, and breadth of diversity of the portfolio, all aimed at keeping it from breaking the buck.
According to this rule, a Money Market Fund has to receive its complete principle and interest within 397 days. The average maturity of the fund must be reached within 90 days, though many will be able to reach it much sooner.
The credit quality regulation requires specifically that the funds hold the highest quality securities. At least 95% of the fund must be invested in securities which have received the highest ratings of two Nationally Recognized Statistical Ratings Organizations(NRSRO).
The investment portfolio must be diversified to limit the investors exposure to risk for a single issuer. This helps protect you from a failing security wiping out your investment. Having a broad and diverse portfolio is a great safety measure to keep the Fund's returns strong.
Money Market Funds typically indicate their rates based on a 7-day yield, this is the best way to judge their performance versus a Money Market Account rate's annual yield. Many funds will quote the S.E.C. 7-day yield as their estimation of what type of rates you should expect. The S.E.C. calculates this by assessing the net interest income accrued during the prior 7 days and deducting 7 days of management fees. This number is divided by the average amount of the fund's investments over the following week. This is multiplied by 365 and divided by 7 to get the S.E.C. 7 day yield.
Ultimately, there are no cheat codes to smart investment. There are always variable risks, rewards, rules, penalties, and fees associated with each method of money management. One must do serious research to determine the best way to make use of your money. However, considering the available options, Money Market Accounts and Money Market Funds are the investments of choice for people who have a good amount of cash on hand, but need to be able to access these funds over a shorter window of time. This profile of investment differs from other classes, which may yield higher long term, or yield less, shorter term, and allow for a smaller minimum investment. For the purpose intended, though, Money Market Accounts and Funds are a valuable investment class.
