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If I Were Queen of America...

September 26th, 2008 at 10:34 am

I would put every single American on "time out," explain the difference between a Money Market Account and a Money Market Fund, over and over again if necessary, and not let them leave time out until they really understood it.

13 Responses to “If I Were Queen of America...”

  1. thriftorama Says:

    We'd be on time out forever.

  2. scfr Says:

    thriftorama, I'm afraid you may be right.

    I did what I could ... started a new link in the forums:
    Text is http://www.savingadvice.com/forums/investing-banking/41138-money-market-account-vs-money-market-fund.html and Link is
    If you would like to chime in, that would be super! Coming from a PF writer, it would mean more. Me...I'm just a "Jane Doe" at my computer, feeling sorry for folks who are stressing when they do not need to be.

  3. PauletteGoddard Says:

    Between reading this, and Debt Free Living Guru's blog post, I am a little confused (but not stressed). I do know the difference between money market funds and money market deposit accounts: I had one, and currently have the other, at a credit union.

    Is it that MMDAs are FDIC insured only if they are held at a bank, and NCUA insured if they're at a credit union, but not if they're at investment companies? Why would one choose to have a Money Market Deposit Account at an investment company and not at a bank, where it could be insured?

  4. Ima saver Says:

    I have a money market fund at vanguard. I opened it when they were paying a pretty good rate. Now, I only have about $5000 in it because I can get a better rate on my checking account. so, I am not too worried!

  5. scfr Says:

    PG - Afraid I'm unfamiliar with Credit Union insurance.

    As far as having a MMDA at an investment company, 3 comments:
    - I'm not even sure there is such a thing. For example, I just went to Charles Schwab's web site and searched for "Money Market" --- The only thing that came up was Money Market FUND (no Money Market ACCOUNTs)
    - Is it possible that the blog you referred to confused a Money Market Account and a Money Market Fund? ... And I would like to point out for the sake of civility that I had not read that particular blog entry when I posted this ... My entry was prompted a posting I read on the forums.
    - If there is such a thing as a MMDA at an investment company and not at a bank that is FDIC insured, no, I can't imagine why anyone would want one of those. A big part of the attraction of MMDAs as far as I'm concerned is the FDIC insurance (or the equivalent at a credit union).

  6. PauletteGoddard Says:

    I'm beginning to understand how people get confused or wallow in innumeracy though, if gurus who publish blogs and books get their info incorrect. I bought a Beth Kobliner book back in 1997 that stated only U.S. citizens could get IRAs. I am living proof that that statement was incorrect at the time it was made (I opened an IRA that year, before I became a permanent resident, and all the fund company needed was a Social Security Number), and is incorrect now.

  7. Aleta Says:

    I joined the Save Yourself Account at TDAmeritrade with Suze Orman. When I looked at it the other day it is MMDA (Money Market Deposit Account). It seems to me that it would be covered by FDIC insurance. Thanks for bringing this up.

  8. monkeymama Says:


    I just saw your post and replied.

    Panic is not good for either type. Bah!

  9. scfr Says:

    I agree monkeymama ... And this was the entry that originally got to me:

    Text is http://www.savingadvice.com/forums/general-discussion/41134-money-market-accounts.html and Link is

  10. monkeymama Says:

    I saw that - I couldn't imagine Suze told everyone to leave all of their MMMFs either though. Misinformation all around. (I am sure she said be careful if your MMF invests in Lehman and AIG and the like - but not all do).

  11. scfr Says:

    I did not see it, but I would be willing to bet a very large amount of money that Suze did not tell "everyone" to leave their MMFs! Just speculating here, but I wonder if she was addressing those folks who cannot afford to lose even one penny of their investments? ... In which case, they should not have been in MMFs in the first place! I'm sure there are plenty of people out there invested in MMFs who mistakenly believe they are in a FDIC-insured MMA.

  12. Broken Arrow Says:

    PG, regardless of the name being used, there are essentially two different types of "money market" accounts.

    The first kind is a bank savings account. They may or may not have the words "money market" in it, but in the end, it's a bank savings account. Bank savings account is covered by the FDIC.

    The second kind is a typically short-term, fairly liquid mutual fund that is typically known as "money market mutual fund" or whatever other naming convention it wants to use. The goal of this mutual fund is capital preservation and the ability to liquidate quickly. However, like any other typical mutual funds, it does not have FDIC protection. Only bank products have FDIC protection. They MAY be covered by SIPC insurance protection, but you have to read your investment firm's fine print to be sure.


    Now, a bit of history if it will help clarify some stuff. However, I'm recalling this off the top of my head, so please don't hold me to it, and feel free to double check me.

    After the Great Depression, the Glass-Stegall act put a lot of limits on banks, but they were designed to prevent another such depression. Among the limitations, I think they had imposed an interest rate cap (I believe it's 5%). That way, banks don't have to be pressured to find risky investments that would return more just to compete with each other.

    Then we had a period of time when inflation started running wild, but the Glass-Stegall act never took inflation into account. At one point inflation actually hit double digits while banks were still forced to cap their savings account interest rates at 5%. So, naturally, people started to look elsewhere to stash their money.

    Enter the investment industry. They said, "So, we've created this new product right? It's practically like a bank savings account. You can sell anytime, and pretty much get your money that same day, as though you're withdrawing money from a bank savings account. Now here's the beautiful part. There's no limit on our interest rate! And even though it's not under FDIC protection, it's actually very safe! Even though it's a mutual fund, it's almost like money sitting around, so we're going to call it a Money Market Mutual Fund or Money Market Fund."

    So, that's how MMFs came into existence. And not surprisingly, they were a hit. Banks, losing money to this new popular investment, started howling at our government to get the laws changed. Uncle Sam, in turn, decided to allow certain workarounds to the Glass-Stegall act-- the details escape me at this time-- to allow the creation of a new type of bank savings account that is not limited by the antiquated 5% cap. As a competing product, it had a similar name, such as "Money Market Savings Account" or something similar.

    The banks also took it a step further and updated all of their old savings accounts to comply with this new workaround, effectively making all bank savings accounts this new money market account, regardless of what it's named as, and regardless of whether we now realize it or not. Again, all bank savings account today are the same now, regardless of what they are named as. Of course, if it wasn't confusing enough, some have decided to keep the "money market savings" moniker, perhaps as a nod to their heritage.

    However, there is still a difference between a money market savings account offered by a bank, and a money market mutual fund offered by an investment firm. And that's what we need to be able to differentiate.

    Today, the money market mutual funds are not as popular as they used to be, so a side question is why have them now? In short, they are still useful in some circumstances. For example, thanks to their relative liquidity, it's a great place to park your money before an investment buy or after a sell. In other words, because you're earning interest, it's better than simply having your cash sit around doing nothing. Also, as a legitimate mutual fund investment, they can also be used as a part of your conservative portfolio allocation.

    I guess another question is why so many "experts" are advising to pull your money out of these money market mutual funds? Most money market mutual funds invest in short-term debt products, and some MIGHT be invested in this toxic mortgage-related stuff that's falling apart on us right now. Some key words to watch out for are MBS (mortgage backed securities) and MRB (Mortgage Revenue Bonds).

    Personally, I don't agree with the conclusion to pull out, because not all MMMFs invest in toxic securities, and not all MBS are actually even risky. However, I do agree to take a closer look at your funds, and make sure there's no funny business in there. However, this may be a bit much even for the average investor, so as a broad, general advise, perhaps that's why they advise to simply be safe rather than sorry and pull some money out.

    I'm sorry for being so long-winded. Can I be released from time out now?

  13. boomeyers Says:

    If you were the queen, I would be a loyal subject! Great topic!

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