March 26, 2023
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For this Suze School episode, Suze gives us a lesson in understanding a Money Market Account and a Money Market Fund.
Suze: 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.
Suze: It seems that the last Sunday podcast that I did 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.
Suze: First of all, a money market account is usually issued by a credit union and or a bank.
Suze: It also usually pays you a higher interest rate
Suze: than many savings accounts pay you. But in a sense, 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
Suze: A money market mutual fund is usually purchased via a brokerage firm and it is not covered by FDIC or NCUA. It is insured by SIPC. Security Investor Protection Corporation.
Suze: 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
Suze: and $250,000 in cash. And in your mind, that means that if you have more than $250,000 in a money-market fund
Suze: 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.
Suze: A money market mutual fund
Suze: is a pool of money that all of you invest money in
Suze: and you buy shares in that money market fund. It's called a fund
Suze: not a Money Market account. An account is a savings account, a checking account. A fund applies to when you have 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.
Suze: You invest $10,000 in a money market fund.
Suze: You own 10,000 shares of that fund at a dollar a share. Money market funds, hopefully
Suze: 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. Except in 2008 with TD Ameritrade, it did go down when everything was happening,
Suze: TD Ameritrade's money market fund broke the buck. That is what it's called. That's what you heard me talk about 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
Suze: that you decided you wanted to put $500,000 in a 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.
Suze: That means that you own 500,000 shares at a dollar a share of the money market fund.
Suze: Now, let's say
Suze: 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 of cash.
Suze: And now you are afraid that you have lost 250,000 in your money market fund. No, you have not.
Suze: 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 when they talk about SIPC, they say $250,000 in cash, $500,000 in investments.
Suze: So you would be covered for 500,000 shares of this fund
Suze: 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.
Suze: You would get your 500,000 shares back,
Suze: but those shares would only be worth $490,000 at that time.
Suze: That is why Sheila said last week that you're not always guaranteed to get your money back.
Suze: 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?
Suze: Cash is cash. It's somewhere where it's not earning really 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.
Suze: 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.
Suze: 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.
Suze: 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,
Suze: there's only one thing that I want you to say every single day. And it is as follows: today, wherever 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.
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