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© 1999-2007 by Marabella Books

 

 

 

 

 


Money Markets & CDs

So, you’ve decided that keeping your cash as cash will not help you meet your financial goals in the time frame set for yourself.  Why not keep your cash under the mattress or in a savings account? Because inflation (the rising price of goods) will diminish your purchasing power over time.

However, you may be able to invest with little to no risk, and possibly keep pace with inflation by investing in the “money market.”  The money market (as distinguished from the capital market), is comprised of:  treasury bills, municipal notes, certificates of deposit (CDs), commercial paper, federal funds, repurchase agreements, call loans, and banker’s acceptances.  Let’s discuss the two investments most everyday people use – CDs and money market funds.

CDs

CDs are certificates that are issued by banks and thrift institutions, and can be purchased at banks, thrift institutions and some brokerage firms.  When you get a CD, the issuer is establishing that you have deposited funds for a specified period of time.  When that time has ended, your CD has matured.  Upon maturity, your CD will have earned the fixed rate of interest promised to you. Plus, you would then have use of the original principal that you invested.

There are a variety of types of CDs, currently paying between 4.5 and 8% depending on the maturity period and the risk that it will be called away (that is, “callable”) by the issuer before it matures.  With a callable CD, the issuer may “buy” it back from you before it matures.  On the one hand, callable CDs may have a higher interest rate to compensate the investor for the risk of being called. On the other hand, once the CD is called, you may not be able to reinvest at a time when interest rates are as high as when you purchased the CD initially.

Money Market Funds

A money market fund is an investment company managed by an investment manager who is responsible for investing in a combination of treasury bills, municipal notes, certificates of deposit (CDs), commercial paper, federal funds, repurchase agreements, call loans, and or banker’s acceptances.  The manager invests pooled cash from a variety of investors.  The advantage is that the investor owns shares of the company, not the underlying investments.  Therefore, it’s liquid (easily converted to cash) and currently pays higher interest (about 4 – 5 % if taxable, about 2 –3 % if non-taxable) than a regular passbook savings account. 

While it sounds all good, it’s important to remember a few things.  Money market funds tend to pay less interest than CDs.  Also, if you open a money market account to replace your checking account at the bank, ask whether the monies are insured.  In most cases, money market investments are not insured by the FDIC and other entities. 

You can attempt to keep pace with inflation by investing in CDs and money market funds, but understand that you aren’t working your money to the fullest because the risk is relatively low.  In the world of investing, no meaningful risk means no meaningful reward.  But jumping into riskier investments without understanding the potential for loss is not the way to begin investing.  If you are new to making conscious decisions about your money, start conservatively and work your way into moderate, then aggressive risk.  The more you understand, the less frightening it will become.

Copyright © 2000, Marabella Books