Financial Tip of the Day

Pop Quiz: What is the safest place your money can be? Most would answer: cash.

Pop Quiz Number 2: What happens when your cash isn’t as safe as it used to be? Most would answer: hit the panic button.

When Cash Isn’t Safe

These are questions investors are grappling with today. Or worse, they don’t even know there is an issue. Why? Most all investors hold their cash in one of two places: 1) on deposit at a bank 2) in a money market fund. Let’s discuss both of these.

Holding Cash at a Bank

When you hold cash at a bank, your cash is only as safe as the bank who holds it. In the event of a bank default, while there is protection from the FDIC (read: What is the FDIC?), you could lose some or a good amount of your investment balance. Be sure to research both the stability of the bank and the insurance that it holds.

Holding Cash in a Money Market Fund

When you hold cash in a money market fund, you are not holding a stock or a bond or a CD. What are money market funds? You are actually holding a very short dated mutual fund of bonds. These money market funds may hold short term U.S. Government Bonds, short term municipal bonds or short term corporates. However, it is important to know that those money market funds that hold short term corporate hold exposure to European Banks. As such, some investors have been questioning the safety of these funds as European banks continue to struggle.

Be aware. The first rule about making extra cash is keeping the cash you have.

Related Articles: Wall Street Journal: Hidden Dangers Lurking in Money-Market Funds

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