How often do you curse your bank for paying you less than 1% on your savings or a grand total of nothing on your checking account?  What are you doing with your cash?  We all need to have an emergency reserve, but it need not be kept under the mattress or in a checking account.  A Certificate of Deposit (CD) can tie up your money, and may penalize you for accessing it prior to maturity.  

If you have not taken advantage of money market funds it’s time you consider the benefits!  I’m not talking about the so-called money market account offered by your typical bank that isn’t paying 3%.  Many banks will advertise a teaser rate of 5% on their money market only to send your account back to sub 3% when the teaser period is up, this is often within months.

Similar to a stock mutual fund, when you invest in a money fund you’re pooling your resources with other investors.  A professional manages the fund, but rather than invest in stocks the manager will purchase Certificates of Deposit and Corporate and/or Government Bonds with a maturity of 1 year or less.  Other short term debt may also be purchased.  Because the investments have such short term maturities, they are considered to be the safest of mutual funds.

Two money market funds that I am particularly fond of are the Vanguard Prime (VMMXX) and The Franklin Templeton Money Fund (FMFXX).  Both of these funds are currently earning over a 5% return.  Over the last couple of years investors would have been better off keeping their cash here than in CDs.  If interest rates continue to climb as many are predicting, then money market funds will continue to be a more advantageous investment than instruments such as CDs.

If you are invested with a brokerage firm, chances are your excess cash is swept into a money market fund.  There are some brokerages that require you to ask for this service before they’ll give you the higher return on your money so be sure to make this request of your broker.

One other goodie to remember is the two funds I mentioned above have free check-writing from your account.  There is no need to transfer money to your checking account, the funds will come directly out of the money fund at the close of the market!  A money fund cannot completely replace your checking account however, unless you never write a check for less than $250 (that is the minimum check amount for the Vanguard fund, Franklin’s is $500).

Disclosure