|Course 104: Building Your Emergency Fund|
|Where to Put the Emergency Fund|
Keep your emergency fund separate from your regular bank account. That way, you may feel less of an urge to tap into it in normal times. But thanks to automatic teller machines and online transfers, you'll have easy access to the money if you do need it.
A money-market fund is a great place for your emergency dollars. Money-market mutual funds invest in super-short-term, high-quality debt and are among the most conservative funds available. Their prices (or net asset values) don't move around much. In fact, because they invest in bonds issued by extremely stable debtors, such as the U.S. government and large, financially sound companies, money-market funds can maintain a steady $1 net asset value, making them ideal for investors who don't want to risk their principal.
Money-market funds also offer several features designed to help investors manage their cash reserves. Most offer limited check-writing privileges. It doesn't take much to start out, either. Many money-market funds have low minimum investment requirements.
Why not just stick with a bank? Money-market funds often pay as much as a percentage point more than banks' money-market accounts do. You'd get even less interest than that if you stashed your cash away in a checking or savings account.
There's a minor catch: Unlike consumer bank accounts, money-market funds are not FDIC insured. That means that the government won't step in if something goes haywire and your money-market fund loses money.
However, that danger is minimal. Money-market funds are regulated by the Securities and Exchange Commission, which enforces strict limits on the types of investments that these funds can make. Thus, it is unusual for a money-market fund to "break the buck," or fall below its $1 net asset value.
Unusual--but not unheard of. For instance, during the credit crisis of 2007, reports indicated that some money market managers were holding stakes in problematic securities, including so-called SIVs (structured investment vehicles), which have taken a hit amid the market turmoil. But even in cases such as these, the funds' parent companies typically steps in to support the funds, and no investors lose money.
Investors can take the safer route by choosing a money-market fund that invests exclusively in the direct obligations of the U.S. government. The drawback is that these funds typically pay out less income than those investing in corporate debt, too.
Choosing a money-market fund doesn't have to be hard.
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