I'm about to open a money market savings account but am a little confused by the differences of having a MM account at a bank vs. a brokerage house. All I want to do is start an emergency fund (read: won't be touching the cash unless lightening strikes and all my worldly possessions burn into the ground) where I can have my $ sit and collect more interest (5%+) than it would biding its time in a traditional checking/savings account.So, I have 2 questions:1) What's the difference between a MM account at a bank vs. a brokerage?2) Any suggestions on where I should stash my EF?Thanks!
1) Typically one is a MMA and the other is a money market fund. There are different forms of fund such as municipal ones that may have a tax advantage by having tax-exempt interest for example.2) I'd suggest Vanguard, TIAA-CREF, or Strong as one idea for looking at MMF(Also some magazines like Kiplinger's have lists of highest yielding MMFs if you want to hunt for the top at a specific point in time). Another couple of idears are GE Interest Plus(http://www.gefn.com/interestplus/index.html) and I-bonds(http://www.savingsbonds.gov/sav/sbiinvst.htm).JB
Thanks, jbking! Another question: is one safer than the other? Could I <gasp> lose money putting it into a MMF vs. an MMA?
Well, I think there haven't been many stories about MMFs 'breaking the buck' but then some MMFs are insured like those at the big companies. http://cbs.marketwatch.com/news/story.asp?guid=%7B5F30D560%2DD352%2D4C73%2DA1F7%2DAD0A9398155F%7D&siteid=mktw is an article about that. Similarly, if you have to use FDIC to get your MMA money how long could that take if an emergency springs up and that Internet bank you used went belly up(It could happen in some cases)? Similarly the other suggestions I made have their issues as well if you want to investigate like I-bonds not being redeemable for 6 months from time of purchase and a penalty if redeemed within 5 years or the GE Interest Plus that seems interesting but I'm not totally sold on it. Some MMFs even have check-writing as something else to point out.FWIW, most of my emergency money is in Vanguard's Prime MMF.JB
..."The episode also may lead more money market funds to insure their holdings. About one fourth of all money fund assets are now insured, Crane said. Fidelity, Janus, Vanguard and Federated already insure every bit of their money market portfolios."...Above from article posted from cbsmarketwatch.Does anyone know where to read more about this insurance, is it the sipc or seperate? Does this insurace mean these particular companys funds are safer?
MM at bank (properly called a Money Market Deposit Account): Rate set by whim of bank directors and can change at anytime, many of them have limited checking privileges, insured by FDIC (but it may take months to get your money back, during which time you won't earn interest or have access to your money), minimum balance usually $1000-$5000.MM at brokerage or mutual fund company (properly called a Money Market Mutual Fund): Pays the going rate for highly rated debt that trades on the market (when a bank makes a loan, often times it sells the right to receive the repayments on the open market). Most of them have limited checking privileges. Minimum balance usually $3000-$10,000. Given changing interest rates and credit ratings of the underlying companies, the asset value can fluctuate, but the fund managers have to maintain a $1 share price to be able to advertise it as a money market. If the brokerage house goes under, under the SIPC you may be able to get back your "shares" of the MMMF, but there's no guarantee as to what the shares will be worth.Often times the MMMF managers will cover your losses if there's a default causing you to lose money, or will have insurance which does the same. But this is certainly not guaranteed.
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