The massive interest rate hikes since the first quarter of 2022 have impacted almost every corner of the United States economy.
One of the biggest benefits to individual consumers during this time: the best savings accounts are offering higher interest rates, one-year CDs yielding 5% interest have become easy to find and money market funds have become an attractive place to store your savings.
The Silicon Valley Bank collapse also spooked a lot of people about the safety of their emergency funds. The FDIC’s $250,000 coverage limit for insurance on bank deposits per account started to trend.
People are also wondering whether money market funds are safe. That’s what a listener of the Clark Howard Podcast recently asked.
Are Money Market Accounts Safe For My Cash Reserves?
As you may know, money market funds aren’t covered by FDIC insurance. But Clark has been talking about how attractive they are as an option to store your savings on recent podcasts, including the Feb. 13 episode.
So are money market funds safe? That’s what a listener wondered on the April 13 podcast episode.
Asked Sheryl in Ohio: “After hearing you say Fidelity offers over 4% interest on cash reserves, I called to transfer my Traditional IRA from TD Ameritrade. When Fidelity explained that it’s a money market account and is not guaranteed not to lose money, I was a bit confused. Is this a safe investment for my cash reserves?”
A money market fund is a mutual fund that invests in very short-term, high-quality debt. Clark says that money market funds at Fidelity, Schwab and Vanguard, especially those that invest in U.S. Treasuries or other government securities, offer you protection that is “superior” to FDIC insurance.
Plus, you can get interest that’s often a healthy margin better than what the best savings accounts offer. The Vanguard Treasury Money Market Fund, for example, is currently yielding 4.63% per year with an expense ratio of 0.09%.
“A money market fund that has a fixed share price of a dollar is incredibly safe. It does not have FDIC insurance. [But] don’t worry,” Clark says.
“You’ll be earning [more than] 4% interest and you’ll be in the safest of all securities which is Treasuries or government securities. If you’re in a regular money market fund that is set at a dollar a share price, it is as safe as safe could be.”
Money Market Funds and ‘Breaking the Buck’
There have been instances where the share price of these money market funds dipped below $1. This is called “breaking the buck.”
It happened in 1994, for example. And it happened again in 2008 during the Great Recession, coinciding with the Lehman Brothers bankruptcy.
However, that led to the SEC creating even tighter government regulations.
“Fifteen years ago, there was one money fund that had some problems and it looked like people might lose 1% of their money,” Clark says. “And there were new rules put into place that it made it ultra safe for people buying the dollar-a-share funds.”
Clark read a recent article predicting what could cause money market funds that invest in high-quality, ultra short-term government debt to break the buck. One of the primary ways? If there’s a nuclear war. Clark mentioned the article as a referendum on just how safe these funds are.
“I have my money in them. Although I actually have my money in a tax-free municipal because if you’re in a higher tax bracket, that’s a better place to be,” Clark says.
“And I sleep well at night knowing that these obligations are ultra short term and I’m not worried about them breaking the buck.”
Final Thoughts
Money market funds aren’t covered by the FDIC. They’re also as close to bulletproof as you can get, Clark says.
If something causes a breakdown to the funds that rely on short-term government debt, there are much bigger issues.
These funds probably won’t offer rates approaching 5% per year for a long period of time. But for now, they’re an excellent place to stash your savings if you want to squeeze out some extra yield or diversify away from bank savings accounts.
