All Money Market Products Are Not Built The Same
The recent Fed rate hike is a godsend for savers like me -- our emergency fund now earns more than 3% in savings or money market accounts. However, all money market products are not the same. Recently, SEC imposed a fine of $700,000 on Ford Credit, Ford Motor's financing arm, for its insufficient disclosure of the nature of the Ford Money Market product it offers.
Do you think Ford Money Market is just another savings product like VirtualBank's eMoney Market or ING Direct's Orange Savings Account?
At the first glance, Ford Money Market offers attractive savings rates (3.56% for balance up to $14,999, 3.71% for balance between $15,000 and $49,999 and 3.86% for $50,000 and above), free check writing, bill payment and free online transfers. But what is hidden in the fine prints is:
Ford Money Market Account is a direct obligation of Ford Motor Credit Company. It is not a diversified investment and is not FDIC insured.
What it means is by putting money into the account, you are essentially buying (liquid) debt from Ford Motor. And in case you don't know, the carmaker's credit rating was recently downgraded to junk.
Ford Money Market is not the exception; another familiar name is associated with PayPal. Many PayPal users know one can earn an interest on PayPal balance if one enrols into its Money Market program. As disclosed by PayPal:
[Y]ou can elect to earn a return on your funds by enrolling to invest all funds that you receive into the PayPal Money Market Fund. The PayPal Money Market Fund is not FDIC insured, not guaranteed by any bank and may lose value.
Yes, although bearing the same name of "money market," what PayPal offers is a mutual fund that is not covered by FDIC insurance. It is very unlikely that a Money Market Fund will lose value now that the Fed rate is at 3.00%, but still, don't consider it as a rock-solid savings tool.
Tip for the day: Read the fine prints and make sure your emergency fund is insured by FDIC.
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Yet another reason to love my ING Direct account... I only wish that, as in my home country of Canada, they offered low-interest lines-of-credit and mortgages, as well as ATM machines. Too much to hope for, I suppose???
I've given up on mutual funds myself. My Wall Street brokerage firm has a circa $22 billion money trust fund that has an average investment of something like 40 days (ie, it's short term). Most of the holdings are to banks to meet short term obligations (about 60%). Because the terms are very short, it's always close to the current interest rate of mutual funds.
And since it has thousands of investments, the risk is very well spread out. I find it interesting to see that my money is probably being lent out to your bank(s). :)
Oops. My comment should say "I've given up on money market funds", not on mutual funds. Darn!
I've foubd credit unions to be good for above average rates
