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January 29, 2011

Do you know the value of your Money Market Fund? What you think

Some money market funds maintained a $1 price during the financial crisis by subsidizing the funds.  Some money market funds were closed.   
There are some that have speculated whether the remaining funds would increase their expenses to recapture the amounts they subsidized.  Starting in February funds will be required to disclose the actual market value of the funds holdings.  If the difference between the market value and the $1 are more than a minimal amount, some may question whether money market funds are meet their needs.
Savings account insured by the Federal Deposit Insurance Corporation (FDIC) or similar insurance for credit unions and brokerage firms may be more appropriate for short term liquidity needs.  There is a wide range of interest rates and services available among financial institutions. 
With a little more effort higher interest rates may be realized with certificates of deposits (CD).  CDs insured by organizations such as the FDIC provide the same safety as  savings accounts and generally will provide higher interest rates than savings accounts.  CD’s usually have a penalty or interest charge if they redeemed before their maturity.  By spreading the funds over different maturities and in combination with savings accounts an individual may have adequate liquidity and earn higher interest rates.
Since the amount of an early withdrawal is known (redemption value less penalty or interest charge) the value can be  calculated without regard to fluctuations in interest rates.  This makes it possible to determine if the CD fits your situation at any time.
Financial institutions change their rates on CD’s from time to time.  To get the best rate, you will need to shop around.  Recently online financial institutions have had higher interest rates.  The institution with the best rate at any point in time will not have the best rate the next time you are ready to buy a CD.

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