A money market account can be a part of your overall portfolio, but its value as a long-term investment is somewhat limited. You can, however, use a money market fund to build a solid emergency fund you can draw on in the event of a job loss or other unforeseen circumstance.
One of the chief benefits of a money market account is its safety. As long as you choose a bank that is fully insured by the FDIC, the money you invest is protected up to a total of $250,000 per account. You have no such guarantee if you invest in stocks, bonds or mutual funds. The safety of a money market account makes it an excellent choice for money you cannot afford to lose.
A money market fund is the perfect vehicle for building an emergency fund since you know the money you put in is safe from loss. You can transfer a small amount of money from your checking or savings account each month until you have accumulated at least three to six months' worth of living expenses. You can then draw on those funds if a job loss or large expense strikes.
One of the major disadvantages of a money market account is the fact that the yields tend to be very low. In fact, the yields on money market accounts are among the lowest in the investment world. You might earn more than you would on a savings account, but you will probably earn less than you would on a mutual fund or even a certificate of deposit.
While a money market fund can be a part of your portfolio, it should not be your only investment. The low yields of money market funds mean that you could lose purchasing power over the long run, so your money could be worth less than it is now. One smart strategy is to keep your short-term funds in a money market account while having your longer term money in a well diversified mixture of stocks and bonds. Keeping money you expect to need within the next five years in your money market fund lets you draw on those funds for short-term expenses. In the meantime, the money you invest in the stock and bond markets can give you the growth you need for your longer term goals.
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