So, you’ve decided to buy a house? And you are considering money market funds to save for a down payment? The entire process of buying a home is both exciting and overwhelming – a roller coaster of emotions – but when done properly it can be one of the best and most defining decisions of your life. And one of the most important steps to the process is saving for your down payment.
Where did now-successful homeowners keep their money while saving up for the down payment? Similarly, what are the soon-to-be homeowners doing? Depending on the down payment amount, how long until you need to make the actual payment, and current market conditions, a money market fund may be a great option for you to consider.
Just about any financial decision you make comes with its pros and cons, and a down payment on a home is certainly no exception. It’s important to take a look at both sides of the track before crossing. Here’s a quick overview, because some Banks.com readers out there have a train that’s rapidly approaching.
The Basics
A money market fund, also known as a money market mutual fund, is simply an open-ended mutual fund. Although they are still considered a type of investment, they are generally about as safe as a regular savings account. Their inherent safety comes from the fact that the federal government only allows money market funds to invest in high-quality short-term investments issued by American-based corporations and various government entities.
Conversely, a typical mutual fund usually has the potential for a better return. But the key word there is potential. Investing in mutual funds also come with elevated risk when compared to the hand-picked investments allowed by the feds for money market funds. If you’re saving for the down payment on a home, you probably don’t want to risk losing a significant amount of your principal. Which makes money market funds an appealing option.
Pros of Money Market Funds
There are some good points to money market funds that can counteract the downsides. The positive aspects become even more apparent when you stop and realize that this type of fund is best thought of as a means to protect your money and still incur some small gains — as opposed to an attempt to maximize returns.
- They’re still a safe place to keep money: Despite the lack of FDIC backing, these funds are still federally regulated. The regulations are there to ensure that this type of fund only invests in high-quality short-term investments.
- It’s not exactly liquid: Wait… didn’t we list this in the negatives above? We did! But the limited liquidity can also be a good thing! For those that have trouble hanging onto their money, especially when it’s so easily accessible, having reduced liquidity may mean the difference between spending or actually saving your money. Having the money tied up in a money market fund will make it a bit harder to succumb to impulsive shopping or sporadic spending habits. It’s still fairly easy to use the money in the fund, but not as easy if it were sitting in your checking account while you’ve got a debit card inches away from your hand.
- The rate of return is higher than deposit accounts: Sure, when compared to other funds, the rates aren’t jaw dropping. However, when compared to most checking and savings accounts, the returns are almost always higher.
Cons of Money Market Funds
Every financial decision you make should be thoroughly researched. The fact that you’re reading this article shows that you’ve already made the smart decision of doing your due diligence regarding saving for your down payment. Before we get into the positive aspects of money market funds, let’s take a look at some of the downsides.
- Money market funds are not FDIC insured: Although FDIC insurance is rarely used, even when banks fail, some folks out there may only feel safe depositing their money into an FDIC-insured account.
- It’s not exactly liquid: Should an emergency arise and you need to access your cash quickly, money market accounts may require a bit more time to withdraw your money than a traditional checking or savings account. For some people this may be seen as a good thing though, more on that later.
- The rate of return won’t be breathtaking: Don’t think that just because this is considered an investment that you will be sitting pretty from accrued interest payments. These funds are extremely safe, and the low risk means the rewards won’t be as big. You know what they say…”High risk/high reward”. Well, the inverse is also true…”Low risk/low reward”. And money market accounts are certainly the latter.
Do Money Market Funds Ever Lose Money?
Money market funds have only “failed” twice in their history. The SEC regulates these funds and, for individual investors (not big institutions), they try and maintain a $1-per-share price. Back in 1994, the Community Bankers U.S. Government Money Market Fund was liquidated at $0.96 at a loss of $0.04 per dollar. The second failure came in 2008 from the Reserve Primary Money Fund which liquidated at $0.991 at a loss of nine-tenths of a penny per dollar.
These two losses prevent these funds from being called foolproof or fail-safe. It has happened, and it can happen. With that being said, we’re pretty sure even the most savvy investors out there can’t name such a popular fund (or stock for that matter) that has only failed twice. 2008 sent A LOT of markets tumbling, meanwhile the RPMF only lost a fraction of a penny per share.
With that being said, they are considered one of the safest, albeit conservative, places to park your money and still earn some interest. Down payments for a home can easily get into the five-figure range. Every penny counts when saving for a home, and that bit of interest may just give you the push you need to make that down payment.
