How risky are money market accounts and how much interest will I earn?
I will be opening it with $1000 and adding $1000 each month for the next year. The interest will be 0.10% and the APY will be 0.10%. At these rates, what will my balance be at the end of the year?
Also what is the risk of losing my money with a money market account? I have heard that they are unstable.
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August 13th, 2010 at 6:57 am
What do Money Market Funds Invest In?
These funds invest in short term instruments that mature in less than 13 months – at a maximum. By keeping a short time-frame, these funds attempt to reduce risk. In fact, the SEC says that the average maturity of all the investments in a money market fund must be less than 90 days. The longer you loan money to somebody, the greater the chance that something will happen and they won’t be able to pay you back.
Typical investments inside a money market fund might be US Treasury issues, short-term corporate paper, and CD’s.
What Risks am I Taking in Money Market Funds?
There are at least three risks that we should highlight.
First, a money market fund is technically a security. The fund managers attempt to keep the share price constant at $1/share. However, there is no guarantee that the share price will stay at $1/share. If the share price goes down, you can lose some or all of your principal. The US Securities and Exchange Commission notes that “While investor losses in money market funds have been rare, they are possible”. In return for this risk, you should earn a greater return on your cash than you’d expect from an FDIC insured savings account (money market funds are not FDIC insured).
Next, money market fund rates are variable. In other words, you don’t know how much you’ll earn on your investment next month. The rate could go up or down. If it goes up, that may be a good thing. However, if it goes down and you earn less than you expected, you can end up needing more cash.
A final risk you’re taking with money market funds has to do with inflation. Because money market funds are considered to be safer than other investments like stocks, long term average returns on money market funds tends to be less than long term average returns on riskier investments. Over long periods of time, inflation can eat away at your returns.
August 13th, 2010 at 7:56 am
Why not open a savings account.
There are some that are paying as high as .5%.
Go to your bank website and see what they are offering.
Or go to bankrate.com and open an online savings account with everbank or ING.
(click on savings – best rates)
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August 13th, 2010 at 8:30 am
you can find it in tools on this website http://sitefinance2007.notlong.com/7AAUNuy
August 13th, 2010 at 9:20 am
They generally have been stable. There was one a year or so ago that dropped in value a little. You would not have believed the storm that caused. The government rushed in and offered insurance for money market accounts as a result. So it is possible that there might be some loss. The interest rate currently is very poor indeed. Your balance at the end of the year will be $12,000 plus maybe $5.00 in interest maybe. The interest rate is not set on money market accounts. It varies from day to day. But as a result the interest rate might increase if the government stops giving money away.