Why Invest in a Money Market?
A money market account is a simple savings vehicle, but a very useful one. You can use a money market account to save for a major purchase, finance the down payment on your first home or build an emergency fund you can draw on if you lose your job or suffer an economic setback.
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Safety
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As long as the bank you choose is fully insured by the FDIC, you can rest assured that your money is safe. Money market deposits are insured by the FDIC up to a limit of $250,000, as of 2011, and as long as the total of your principal and interest does not exceed that amount you cannot lose a penny, even if the bank goes out of business. This safety can be very attractive, especially for money you expect to need in a few months or years.
Emergency Fund
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Everyone should have an emergency fund in place, and a money market account makes the perfect vehicle for building one. Experts recommend that all workers have an emergency fund containing at least three to six months' worth of living expenses, and some recommend even more. You can start building your emergency fund by transferring money from each paycheck until you have enough money to meet your short-term needs.
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Major Purchases
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Paying cash for a major purchase like a new home appliance or a new electronic gadget can save you a lot of money compared to financing those items with a credit card. You can use a money market account to save up for those major purchases and avoid the interest charges you would otherwise face. To use a money market for this purpose, you can allocate a specific amount of money from each paycheck and send it to the money market fund until you have enough to finance the items you want to buy.
Diversification
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It is always dangerous to put all of your money into a single investment class, and a money market account can provide valuable diversification for your portfolio. A balanced portfolio should contain both long-term investments like stocks and short-term investments like certificates of deposit and money market accounts. You can also use the funds in your money market account to buy into the stock market during down periods, allowing you to profit even more when the market turns around and starts going back up.
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References
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