Investing Crash Course: Money market funds

If you’re looking for different places to park your money, Money Market Funds are generally a safe and reliable way to earn a bit more interest over your standard savings account. These funds tend to be low risk, stable investments and work well for shorter term investment strategies – six months to a year.

But what is a money market fund? Think of it like a pie – called a portfolio ¹ - with each piece being a different flavour – holdings ². Each “flavour” is a different piece of an investment product. Here’s a very basic example of what it might look like:

money_market_fund

More specifically, the bank builds an investment portfolio through the purchase of large volumes of investment holdings ³ like Treasury Bills, Commercial Papers, Crown Corporate Papers, Discount Papers and Banker’s Acceptance(s) – these are all stable, secure investment options. In turn, the bank combines all these holdings into a Money Market Fund portfolio and sells their customers pieces of this pie 4.

You can shop around for the best money market rate at places like Bankrate or Nerd Wallet. I wasn’t able to find a comparable site for Canadian resources but the Globe and Mail 5 published an article on the fifteen best performing money market funds in July 2013. A good rule of thumb is to check the rates on your investment accounts monthly. Banks can change these frequently and then rely on the fact that their clients don’t follow up once their investments are set up. You don’t need to have $100,000 for the interest to matter, don’t be afraid to move your money somewhere different if your current fund isn’t competitive.

Let‘s look at an example, perhaps you want to save up for next Christmas by putting away $25 a week for the next year. You prefer a stable and secure investment that won’t bite into your principle- the original amount invested – but still give you something better than the average 0.1% interest you see from most bank savings accounts. You plan on cashing in the investment mid-November and you want it fairly quickly so phone up your bank‘s Investment Advisor who suggest their Liberty City National Bank . Money Market Fund with an interest rate of 1.5%. With two minutes of work, you’ve increased your rate of return ten times over.

You might be asking yourself what the big deal is, it’s not like you’re working with tens of thousands of dollars. After all, there’s no way you’d be able to quit your job and live off the interest made with your Christmas fund. The real goal is to start training yourself to think about your money differently, to use your money differently. Make your money work for you instead of it just sitting in your bank account being causally inert.

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[1] Definition of Portfolio. Investopedia. n.d. Web. 29 Dec 2013

[2] Definition of Holdings. Investopedia. n.d. Web. 29 Dec 2013.

[3] McFarlane, Greg and Betty Kincaid. Control Your Cash: Making Money Make Sense. Minneapolis: Mill City Press, 2010. Ebook edition.

[4] McFarlane, Greg and Betty Kincaid.

[5] Nelson, Jacqueline. “15 Leading Money Market Funds.” Globe and Mail 22 Dec. 2013. Web. 28 Dec 2013.

 

 

 

5 comments
DC @ Young Adult Money
DC @ Young Adult Money

Great overview Lindsey.  Money market funds are something I hear about quite a bit but haven't read a true overview/explanation about them.

brokeandbeau
brokeandbeau

I feel like money market funds yield so little.  I've seen savings accounts with better returns :/

Matt @ Mom and Dad Money
Matt @ Mom and Dad Money

I like what you say at the end about changing your mentality. The one thing I would caution against is getting too caught up with interest on money that's just meant to be kept safe. Any money market fund is going to be safe, but to extend that mentality further can start to get people into trouble.


But if your safe money can earn 1.5% instead of 0.1%? That's nice!

Lindsey at Sense
Lindsey at Sense moderator

@Matt @ Mom and Dad Money Hey Matt, you're absolutely right about the interest rates - it's not such a priority when you only have money sitting there for a little bit. For me, it was more about getting into the habit of looking at the way I'm using my money. Kind of like practicing.

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