When it comes to storing your money, there are a ton of different options. Cash, physical assets, securities, the list goes on and on. In the past, I’ve discussed ways to store, preserve, and grow your money in the long run. And while I have discussed some short-term alternatives in passing, this article will be dedicated to one way you can store and (somewhat) grow your money and still have access to it in the near future. This is through money market funds. Money market funds are short-term, relatively secure, low-profit investments that are great for temporarily storing money.
Before I get into the details, let's discuss some of the defining qualities of short-term investments. By definition, the goal of an investment is to generate a profit, therefore, one of the qualities of a short-term investment is that it should have the potential to provide you with more money than you initially put in.
Another element of short-term investments is the fact that, by definition, there is a restricted time frame. So, short-term investments should aim to have minimal risk, as time is not on your side. You cannot afford to sit on these investments for years and hope to make back any losses as you would with longer-term investments.
Finally, short-term investments should be relatively liquid and accessible, meaning you should be able to turn your investment into cash in a relatively short time frame and with few restrictions.
With that said, the first short-term security/asset/investment I’ll be discussing is the money market fund. Money market funds are mutual funds, meaning it’s funded using money from a ton of different investors, like me and you. That money is pooled together and used to buy different assets, like stocks or bonds.
You don't have to do any of the actual selecting and investing of assets, that's the fund's job. In short, you're investing into a fund that then invests in other assets(invest-ception).
Money market funds focus on purchasing short-term investments, like bonds near maturity. This is what makes them less volatile, and easily convertible to cash.
You can sell your investment in a money market fund at any time; there is no minimum time/lock-up period/maturity. However, because there is minimal risk, money market funds also offer limited profit.
Interest rates, or the amount of money you're expected to make, are often provided in one-week intervals, meaning the percentage you see will be the amount of interest you will make in one week. As such, they're typically low relative to long-term investments, ranging from 0.01% to 0.1% per week.
There are three main kinds of money market funds: prime (general focus) money market funds, which invest in short term corporate debt (corporate bonds), government money market funds, which invest in government-backed securities (treasuries), and tax-exempt (municipal) money market funds, which invest in securities that are exempt from either federal or state income tax.
Money market funds can be bought in shares or similar units, using a brokerage like Vanguard or Schwab, and sometimes, your bank. It's important to look at the minimum investment amount when considering which fund to purchase. Some, like the Vanguard Federal Money Market Fund, require relatively low minimums (under $5000), while others, like the Wells Fargo Cash Investment Money Market Fund, have minimums of as high as $1,000,000.
To summarize, money market funds are a great short-term investment you can use to store money safely and generate some profit. They can easily be purchased through a brokerage or bank, and can easily be converted to cash. However, they generally offer extremely low-interest rates/profit when compared to the historical returns of index funds and stocks, but this is the trade-off made for liquidity and stability. And, while they offer low-interest rates, their rates are almost always higher than those provided by savings accounts.