Suze School: Understanding the Difference Between Money Market Funds and Accounts

For this Suze School episode, Suze gives us a lesson in understanding a Money Market Account and a Money Market Fund.

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Episode Transcript

Suze (00:28):
March 26, 2023. Welcome everybody, to the Women and Money podcast
as well as everybody smart enough to listen. This is
Suze O here and today is Suze School.
It seems that the last Sunday podcast that I did

(00:50):
Sheila Bair mentioned about whether money market accounts were insured
or money market mutual funds were insured. It confused you
and you wrote me and go, what did she say?
I didn't quite understand it. So I want to explain
to you now, the difference between a money market account
and a money market mutual fund.

(01:14):
First of all, a money market account is usually issued
by a credit union and or a bank.
It also usually pays you a higher interest rate
than many savings accounts pay you. But in a sense,

(01:34):
it is a savings account. It is insured by FDIC
for a bank, NCUA for a credit union. So money
Market accounts are absolutely insured. Got that, everybody
A money market mutual fund is usually purchased via a

(01:56):
brokerage firm and it is not covered by FDIC or NCUA.
It is insured by SIPC. Security Investor Protection Corporation.

(02:16):
Now, this is where a lot of you get confused.
How does sic actually work? Well, you all know that
it will cover up to $500,000 of securities
and $250,000 in cash. And in your mind, that means

(02:37):
that if you have more than $250,000 in a money-market
fund
that it will not be insured, wrong, wrong, wrong. So
take out your little Suze notebook here because this is
what you need to understand.
A money market mutual fund

(02:58):
is a pool of money that all of you invest
money in
and you buy shares in that money market fund. It's
called a fund
not a Money Market account. An account is a savings account,
a checking account. A fund applies to when you have

(03:21):
an investment. A fund is when different people pool their
money into this one fund and you own shares of
that fund. Every money market fund issues shares.
You invest $10,000 in a money market fund.

(03:42):
You own 10,000 shares of that fund at a dollar
a share. Money market funds, hopefully
their share price or their net asset value, which is
what it's truthfully called. Always is supposed to hold a
$1 value. It doesn't go up and it doesn't go down, hopefully.

(04:09):
Except in 2008 with TD Ameritrade, it did go down
when everything was happening,
TD Ameritrade's money market fund broke the buck. That is
what it's called. That's what you heard me talk about

(04:30):
with Sheila last Sunday. Breaking the buck simply means it
goes under a dollar a share. Now, listen closely. What
that means is this, let's just say
that you decided you wanted to put $500,000 in a

(04:52):
money market fund because they were paying you a great
interest rate and you could get that money anytime you wanted.
So you deposit $500,000 in this fund and that's all
you have at this brokerage firm.
That means that you own 500,000 shares at a dollar

(05:13):
a share of the money market fund.
Now, let's say
that the brokerage firm goes belly up. Now you're freaked because,
you know, SIPC only covers $500,000 of securities but only $250,000

(05:33):
of cash.
And now you are afraid that you have lost 250,000
in your money market fund. No, you have not.
Your money market fund is covered up to $500,000 of SIPC. Why?
It's because it's an investment. It is not cash notice

(05:58):
when they talk about SIPC, they say $250,000 in cash, $500,000
in investments.
So you would be covered for 500,000 shares of this
fund

(06:19):
and it would be returned to you. However, let's just
say that the firm also at that time, broke the
buck and now these 500,000 shares are only worth $0.98
a share.

(06:39):
You would get your 500,000 shares back,
but those shares would only be worth $490,000 at that time.
That is why Sheila said last week that you're not
always guaranteed to get your money back.

(07:00):
You're guaranteed to get your shares back, but not necessarily
the cash that you put in. Now, chances of it
breaking the buck is pretty nil, but you just need
to understand how it works. What is $250,000 in cash?
Cash is cash. It's somewhere where it's not earning really

(07:23):
an interest rate. It's just there. The other day, Colo
had a Treasury bill that I had purchased for him
come due and he now has $20,000 in cash. When
you look online at his statement, it says $20,000 in cash.

(07:46):
So cash is cash. A money market fund is shares.
And now you know the difference between a money market
account and a money market fund. All right, that brings
us to the end of this week's Suze School. Just
want to remind all of you on March 30th.

(08:09):
That's this coming Thursday. I am giving a webinar called
Prepare for the Financial Climate Change to absolutely register for
it for free, go to Suze Orman dot com slash webinar.
It will be at 3 pm pacific time, 6 pm
east coast time.

(08:30):
So many people are registering for it. I can't even
believe it. We are expecting approximately 50,000 people. So hopefully
you will be one of them. So until Thursday when
I'm doing the webinar and another Ask KT and Suze Anything,

(08:50):
there's only one thing that I want you to say
every single day. And it is as follows
I go, I will create a more joyful, peaceful and
loving world. And if you do so what will all
of you be? You will be unstoppable.