It makes perfect sense.
That is, for a person to save at least 3-6 months’ worth of his monthly expenses for emergencies (prolonged sickness, job insecurity). But really, that concept (that comes across as almost common sense, but not really) – does not even cross the mind of those uninitiated in money matters.
Well, it never crossed my mind prior to 2008 (when I have not yet met – er, won, our financial planner).
But now that it has, and the panic has resonated within (a realization that anything can happen), I would be flustered (and yes, panicky) when our emergency funds fall below that imaginary line (6 months’ expenses, in our case).
Fighting to keep the amount intact is important, but it is also important that this fund is liquid, that it is reachable, that it is safe. But it would also be great if it could also earn interest, right?
Sure, this fund can be kept in savings or ATM accounts, but less than 1% (think .19%) interest per year does not really whet the appetite.
Herein comes the concept of money market.
Well, a money market is a high-yield savings account where the money deposited is invested in low risk investments ranging from government bonds to certificates of deposit (CDs). According to moneymarket.org, money market rates (typically 1%+ per annum) are higher than regular savings account rates because the bank is able to invest the funds in the moving financial market (they can capitalize on the money because it is deposited for a fixed term). The promise is that the risk falls squarely on the bank, since it owes the money market depositor the sum invested (it says so right there on the certificate of deposit!), minus any deductions, plus interest rate per statement term (could be rolling – 30-60-90 days or longer). Contrast this with the regular savings account which the bank cannot really invest (play) with because it can be withdrawn by the depositor at any time (hence, the low (disheartening) interest rate).
Well, some money market accounts do require a minimum, or a minimum maintaining balance, or charge fees if the balance falls below the minimum, but it would be perfect for emergency funds, and for portfolio diversification, and capital preservation, and yes, there are the wonderful gains to consider – and earn (tip is to put in a big amount and invest it long term so compounded interest can work its magic).
Money market was actually my investment of choice back when I was a teen when I did not know any of those sophisticated money concepts. But it is worth revisiting because it should be integral in any portfolio, especially when there is so much uncertainty in the world of finance and the big bad boys do not seem to want to play fair.