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Should You Put Your Emergency Money in a Money Market Account or Money Market Fund?

This coronavirus stuff is scary! If your job is secure for now, don’t wait to start an emergency fund, just in case things change.  That $1,000 payment that Uncle Sam is talking about sending to everybody is a good chunk of change to start with.

In the past, we’ve suggested keeping your emergency money in a money market fund.  But given what’s happening in the world right now, are they safe? And what’s the difference between a money market fund and a money market account at a bank?

For the most part, money market accounts offered by a bank and money market funds available through mutual fund companies like Vanguard and Fidelity are similar.  They both pay very low interest rates. A money market account pays higher interest than a straight bank savings account but less than a money market fund.  

And in order to pay you that interest, they both invest your money in the same things: short-term US Treasury debt, very short-term debt issued by high quality/investment grade corporations, and certificates of deposit. Because they pay obscenely low interest rates on your money, both money market accounts and money market funds are good places to stash your emergency money but absolutely terrible ways to invest for retirement.

The big difference, however, is that money market accounts at banks are FDIC insured.  Money market funds are not.  That said, money market funds have traditionally been considered pretty safe because they aim to maintain a net asset value of $1 per share

In other words, unlike mutual funds or ETFs that invest in stocks or long-term bonds, the value of your investment does not go up or down.  If you put $1,000 in a money market fund today, 5 years from now you’ll have $1,000 plus some interest.  Unlike a stock or bond fund, you have almost no chance of losing any of the original $1,000 that you invested.

However, with this coronavirus outbreak, even investment grade companies will see sales plunge because their offices and stores are closed. So, investors are worried that money market funds invested in what was considered high quality debt will take losses and investors who put their money into a money market fund will lose money as well.

The Federal Reserve bank is stepping in to make sure this doesn’t happen.  But if you’re just starting your emergency fund, you may just want to put it in a money market account at your local bank to be super safe. One other caveat, money market accounts at banks limit your withdrawals to six per month.