Does a Money Market Fund Make Sense for You?

April 24, 2017

Are you looking for a stable value investment with easy access to your cash when you need it but a higher return than leaving your money in a checking or savings account? A money market fund could be a good fit. Here are some things to consider.

What is a Money Market Fund?

While a money market fund is often referred to as a “cash equivalent” because of its low risk profile, a money market fund is not cash. It’s actually a mutual fund which invests in very short term, low risk debt securities such as treasury bills, the debt of various government agencies, and “commercial paper” (short-term corporate IOUs). The investment objective of a money market fund is to earn interest for its shareholders while maintaining a stable net asset value (NAV) of $1 per share. The value of these short-term investments rarely fluctuates, which is why they’re considered almost as good as cash. But since they’re not cash, money market mutual funds yield a slightly higher return than savings accounts or money market accounts.

When to Use a Money Market Fund

The benefits of money market mutual funds — safety, liquidity and a higher yield on “cash-equivalent” savings — make them attractive to many savers with differing goals. Here are some common uses for money market funds:

  • For an emergency fund – A money market fund can be a low risk place to keep 3-6 months of expenses. Make sure you choose one that doesn’t have a penalty for redeeming shares.
  • For cash management – Many financial institutions offer money market accounts with cash management privileges, where unused cash balances are swept into a linked money market fund and shares are redeemed to pay a check, debit card or ATM withdrawal.
  • To save for short term goals like a home down payment – Money you know you will need relatively soon shouldn’t be subject to the volatility of the stock or bond markets.
  • As a parking place between investments – If you sell an investment, you can park the proceeds from the sale in a money market fund while you research other investment options.
  • To balance the asset allocation of your portfolio – Many investment strategists recommend that a portion of any investor’s portfolio remain in “cash,” available to take advantage of opportunities that come up in the stock and bond markets.

When Not to Use a Money Market Fund

A money market fund is considered a short term, cash-type investment. That’s great for your emergency fund but may not be the best place for retirement savings that you don’t plan to access for decades. If you’re not sure what the mix of stocks, bonds and cash (such as money market funds) should be in your portfolio, download this Risk Tolerance and Asset Allocation Worksheet.

Types of Money Market Funds

There are differences among money market funds that make for variations in taxation, safety and yield. Savers with different goals will choose different funds. Money market funds, depending on their objective, can offer a taxable return or a full or partially tax-free yield, depending on what type of debt securities they hold in the fund..

What to Know Before Investing

Money market funds are not federally insured. However, most people consider the amount of extra risk in money market funds to be so minimal as to be easily offset by the slightly higher interest they earn. Fees on money market funds can vary, so do some research before you invest, including reading the fund’s prospectus.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Are You Prepared for the Next Natural Disaster?

April 11, 2017

I seem to have a thing for natural disasters. I know that sounds strange, but I do. I cannot hear about a local natural disaster without immediately getting on the Internet to figure where I need to go to help. I think of how helpless I would feel if everything I had was gone, and I feel compelled to do something – even if it is to pick up debris or pass out sandwiches.

Doing this for a number of years has created what many would consider to be an unusual obsession with preparing for disasters. A lot of this comes from the lessons I learned being onsite to personal disasters and talking to people who have been through a natural disaster. Below are some of the lessons I learned:

ATM’s are in slim supply after a natural disaster. Keep cash on hand to cover necessities. I remember traveling two hours to a tornado site and helping with the cleanup all day. As I got in my car to go home, I saw that my gas was nearly on empty. It took me almost an hour to find a gas station since most were destroyed in the tornado.

The only one that was working could only accept cash. If I had no cash, I would had been stuck. Most people do not think about it, but most natural disasters take out power, which would also take out the ability to use an ATM and a store owner’s ability to accept plastic. Keep a certain amount of cash on hand to cover necessities in a disaster like gas and food.

Make sure your documents are in a place that can survive a disaster and give you easy access to the documents if you need to leave in a hurry unexpectedly.  One of the biggest frustrations the survivors of the natural disasters I talk to experienced was not being able to get all of the available natural disaster aid immediately because they had no documentation to prove who they were or to file an insurance claim.  What I learned from their stories was to make sure I have all of my important documents in one place that can survive a disaster, like a fire-proof safe. You can use checklists like the one on the FEMA website to gather your documents. You can take this one step further by storing your documents electronically as a backup plan in case you could not get to them otherwise.

Do not assume you are covered by your insurance. Review your insurance policies and call your insurance carrier and ask about coverage. Nothing broke my heart more than the anguish of people who realized that few or none of their possessions would be covered by their insurance carrier. Please do not assume that everything you own will be covered. Thirteen years of talking to natural disaster survivors have taught me that this is not the case.

Make it a practice to review your insurance policy annually. Consider using websites like AlertSystemsGroups.com to learn the disasters your area is the most at risk to experience. Contact your insurance carrier and ask if you are covered for these disasters.

Ideally, you want to be covered for cost to replace your possessions at today’s cost without factoring in depreciation. Also, do not assume your insurance company will take your word on everything you have in your home. Consider taking pictures of your possessions and scanning receipts of high dollar purchase to prove what you own.

Find out how you are covered if you can no longer live in your home. This may sound obvious, but one of the biggest needs for many survivors was having a place to stay if they could not live in their homes.  FEMA does offer rental assistance, but this can take time when patience is in short supply. Contact your homeowner’s policy about additional living expenses coverage. This coverage could cover hotel, rental, and even restaurant meals and storage fees.

Don’t wait until it’s too late. Take action now. FEMA has a comprehensive guide to prepare you financially for a disaster, but don’t step there. Make it an annual practice to review your homeowner’s insurance policies to make sure that if the unexpected hits, you can return to your normal life as soon as possible.

How to Decide if You Can Afford a Large Purchase

September 28, 2016

I’ve often read that September and October are the best months to buy large appliances. Since our washer and dryer are showing signs of calling it quits, I’ve been thinking about whether or not we should go ahead and buy new ones while they’re on sale. When trying to figure out whether or not it’s the right time to make a big purchase like this, including cars, furniture or even booking a long-awaited vacation, there are a few ways to look at whether you can afford it.

Cash is King

Ideally, you’d pay cash. As long as you don’t need to dip into your emergency fund, paying cash for the purchase of depreciating assets (or stuff that you won’t be able to sell for as much or more than you paid for it) is the best way to go – yes, even for cars. (For help saving up, try the no-tracking budget.)

Same as Cash or 0% Promo Rates

If you don’t have the cash saved yet, then look at same-as-cash financing deals, but only if you can actually pay the balance off BEFORE the interest kicks in. To figure out if you can afford to do that, divide the purchase price by the number of months you’d get interest-free. For example, if it’s a $1,500 purchase on a 90 days same-as-cash deal, you’d have to pay $500 per month.

Can you afford that payment? If not, don’t use the same-as-cash deal. It’s not worth it.

If you’re using a credit card with a zero percent promo rate, the same rules apply. It’s only a deal if you can pay the balance in full by the end of the promo rate. Otherwise, the high interest rate that will kick in will inflate the price of the purchase beyond reason.

Financing with a Loan or Credit Card

If same-as-cash or zero percent financing isn’t available (or you wouldn’t be able to pay the balance by the time the zero percent period ends), then there are a few things to consider before you take out a loan or use a credit card. First, make sure you’re considering the total purchase price including interest. To figure out how much interest you would pay, use the cost of credit calculator. When you add the interest to the amount you’d be paying for the purchase, is it still a good price?

Debt Rule of Thumb

Finally, anytime you’re considering adding a new monthly payment to your budget, make sure that your total debt payments won’t exceed 36% of your gross income. For example, if you make $50,000 per year, then you would want to keep your debt payments to $18,000 per year or $1,500 per month, including your mortgage. So if you have a mortgage payment of $1,000 and a student loan payment of $250, and you’re looking to finance a car, you could reasonably afford a $250 per month payment.

In a perfect world, you would never finance something that you couldn’t sell for its purchase price or higher. This is why it’s a financial folly to charge clothes or food on a high interest rate credit card if you’re not paying the balance off every month. But in times when debt can’t be avoided, having a plan to pay it off is the best way to avoid getting yourself in financial hot water.

If you have other pressing questions that we can answer on the blog, send me an email, and I’ll do my best to help. Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

 

 

 

Some Of The Riskiest Investments May Surprise You

July 30, 2015

One of the biggest fears people have when it comes to investing is a year like 2008, when the US stock market fell almost 40%. But as long as you didn’t bail out of stocks, you would have recovered your losses in about 5 years and then gone on to make more money. The same is true of every other market downturn since the Great Depression. If you’re worried about the real risk of permanent loss, some of the riskiest investments actually seem much safer. Here are ones that may surprise you: Continue reading “Some Of The Riskiest Investments May Surprise You”

Why I’m Still Sticking With Cash

February 20, 2015

 

I recently read an article in the Delta Sky magazine that talked about the future of how we pay for things. The author summarized that cash and credit cards will soon be as obsolete as encyclopedia sets, 8-track players and typewriters.  His opinion is that new mobile technology such as Apple Pay or Google Wallet will be the preferred way to buy our groceries, gasoline and everything else because it will be more convenient and safer.  In fact, an article in Business Insider points out that U.S. consumers are using cash less than debit and credit cards for the first time.  So, will cash go the way of the typewriter?

While new technology is exciting and can help make our lives more efficient, it can also create new problems. For example, smartphones can keep us connected, but we now live in a world that feels impersonal and forever noisy. I appreciate convenience as much as the next person, but I’m not convinced that giving up cash will make life that much easier.  Here’s why:

  1. Cash is tangible.  Many people prefer cash because they can touch it, hold it, and see it. It is the easiest way to understand how money works and still helps many live within their means. The envelop method of budgeting is based on the principle of putting cash into physical envelopes for different categories. It may be old school, but it works because when the cash is gone – it’s gone.
  2. Cash doesn’t need electricity. I remember when a nasty storm blew through town a few years back and brought the area to its knees. The wind and ice took out the power and/or telephone lines in most of the city for almost a week. As power and phone service were brought back on, it was clear that cash was king. Many businesses had generators to power the basics but only accepted cash. Most banks were closed so no ATM. My father taught me to always have cash on me but over time, I grew lazy and reliant on using my debit card. After living through that storm and lack of electricity, I now keep cash on me at all times!
  3. Cash can earn you discounts. Credit card companies like Visa, American Express and Discover charge merchants up to 3% on all transactions. Apple Pay and Google Wallet are simply fancy ways to pay for your purchases using your existing credit cards. That’s why some business owners offer an incentive for their customers to pay with cash instead of credit.
  4. Cash is secure. Millions of Americans’ private credit data was stolen last holiday season when hackers compromised retailers like Target and Home Depot. These retailers do an incredible job of trying to keep their customers’ information secure, however there are inherent risks with using credit cards. While the new mobile payment companies use new technology to make those transactions more secure, it’s only a matter of time before the bad guys figure out how to hack this too. Cash doesn’t have that problem. If you are concerned about keeping your private data secure, consider paying in cash more often.

These new technologies may indeed be the norm years from now. But until the technology becomes more mainstream and proves to be more secure, I think I’ll stick with good old cash as much as possible.

Not Quite A Cashless Society

February 18, 2014

Winter storm Pax not only caused havoc on roads and at many airports on the East Coast last week, it also caused havoc to my husband’s lunch break.  He’s got a 4×4 monster truck so a foot of snow didn’t keep him home from work nor did the snow stop him from heading out for lunch at the nearby McDonald’s. A few workers had managed to get in and open up for the day, but the storm had knocked out power so the place was running on a generator.  The sign on the front door, “cash only,” had Dave digging around in his truck for enough coins to order something off the dollar menu.  Would you have had enough cash in your own wallet in this situation? Continue reading “Not Quite A Cashless Society”

10 Ways to Get Cash in a Crunch

October 11, 2012

We recently received a question about how to get money “within minutes.” While we certainly can’t promise any way of getting a significant amount of cash that quickly (at least legally), there may be times when we need money for an emergency but don’t yet have sufficient savings. Here are some pros and cons of ways to get cash…(Generally, the quicker you can get the money, the more it will cost you.) Continue reading “10 Ways to Get Cash in a Crunch”

Old School Money Tips That Stand the Test of Time

April 02, 2012

“Are you in entertainment?” I asked the older gentleman next to me as we got news from the pilot we were in a “holding pattern.”  The flight was from LAX to Salt Lake City with a stopover in Las Vegas. I was headed home to Utah but the gentleman sitting next to me was obviously going to get off in Vegas.  He resembled a mix of Johnny Cash with his dark black hair and leather suit jacket with a black shirt and a cast member of the Godfather with the way he carried himself.  In other words, I did not mess with him – no one did. Continue reading “Old School Money Tips That Stand the Test of Time”