Money Market Funds (MMF) — why I have 5 and still want more!
In a nutshell, MMFs always earn you interest, they are safe, you can access your money when you need it and it’s free to keep your money there!
And main reason I love MMFs: MMFs help me take control of my finances with clarity! They enable me to separate my savings since I’m typically saving for different things at the same time.
But what is a MMF? Money Market Funds (MMFs) are savings accounts on steroids!
MMFs are savings accounts on steroids.
It’s a fund whereby multiple people e.g. you and me, give our money to a company like BRITAM or ICEA to invest on our behalf primarily in Treasury Bills and Treasury Bonds. They then take about 1% or 2% from the interest that is earned and give you the rest of the money as your profit.
There’s the age old saying: “invest to secure your future!”. But for you to invest, you first need to save money from your earnings. So the real pecking order of investing is:
- Earn as much as you can
- Save as much as you can… from your earnings
- Invest as much as you can…from your savings
So we’re going to focus on part 2 of this: how MMFs are the perfect way to save and accumulate money!
Please note: A MMF is the perfect place to hold money, as you try to accumulate it for your goals. It’s not the ideal place to invest your money for the long term.
MMFs are the perfect place to hold your money, not to invest your money.
Now, let’s get into the details:
1. Daily Return on Investment
Pick up your favourite daily newspaper e.g. Daily Nation / Business Daily / The Standard and flip through to the business section and you will find what interest rates the different MMFs are currently paying! Yes, that information is out there! Your money earns interest on a daily basis.
Your money never sleeps! It grows daily!
Let’s use a simplified example where the interest rate is consistently 12%. Looking at the image above, this relates to the figures on the left (Daily yield) e.g. 8.82% for ICEA LION & 11.51% for Nabo Africa.
If you kept Ksh 1,000,000 in the MMF for only 15days out of that month’s 30days, and interest rate is 12%, then that means that in that short 15day period, you’ll earn an extra Ksh 5,000!
Ksh 5,000 = Ksh 1,000,000 * 12% *(1/12 months) * (15/30 days)
2. Compounds monthly
Using the image above, there’s another interest rate on the right (Effective Annual Rate) e.g. 9.22% for ICEA LION and 12.09% for Nabo Africa. In our simplified example, it will equate to 12.68%.
Because of the monthly rolling over / compounding, the interest earned at the end of the year won’t be 12%, it will actually be 12.68%! Here is how:
Month 1: Ksh 1,000,000 * 12% * (1/12) = Ksh 10,000
Month 2: Ksh 1,010,000 * 12% * (1/12) = Ksh 10,100
…and by month 12,
Month 12: Ksh 1,115,668 * 12% * (1/12) = Ksh 1,126,825
This means that at the end of the year, the effective annual interest isn’t 12%, but it is actually 12.68%. You get more than you bargained for!
3. Accessibility
When your money is in a MMF, it is accessible enough to get it within a couple of days of requesting for it, but it is also far enough to ensure that you maintain discipline in planning for your money!
a. No handcuffs
With MMFs, you can access your funds whenever you need it.
A typical savings account will require you to keep your money there for at least 3 months for you to get the money plus the interest that it has earned. If you dare withdraw the money from a savings account before that time, then say good bye to the interest!
With Fixed deposits, you can’t even access your money within the term of your fixed deposit. As for SACCOs, if you want to withdraw money, you are forced to cancel your membership and withdraw all of your money — which you’ll receive about 2 months later.
b. Builds discipline
The money is no longer in your bank account and thus isn’t as easily accessible i.e. you don’t see it every time you go to the ATM, or use mobile banking or when you make a payment using your debit card.
Since you don’t see it, you don’t get that itch & that urge to spend that money. With MMFs you typically receive a monthly statement via email.
Since you don’t see the money in your bank account, you don’t get the itch & urge to spend it
Secondly, you’re allowed one free withdrawal per month. You get charged a fee e.g. Ksh 500 for any other withdrawal within the month. When you request to withdraw all or some of your money from the MMF, it’ll be sent to you within the next 1 to 4 days.
This forces you to think think twice and critically before you withdraw any money i.e. it makes you plan well.
4. MMFs — near 0% risk — they always earn $$
In comparison to other investment vehicles e.g. Stock market, Equity funds, Balance funds, business etc. MMFs don’t ever risk losing value. If you put in Ksh 10,000 today, 10 days later that money grows in value.
This is because MMFs are primarily invested in Commercial Paper (overnight loans to banks), Treasure Bills and short term Treasury Bonds which all have a near 0% risk.
Meanwhile in business, you can make losses and in the stock market, the value of your stocks could easily take a nose dive!
5. Separates your savings = Clarity
There’s no monthly fee nor entry fee to keep your money in a MMF. There’s no charge for having a 0 (ZERO) balance in a MMF account nor are you asked to close the account.
This makes it very easy to open up many different accounts as I do and use each one to help you save up for different things. This is instead of using one account to save up for many different things. For example:
MMF 1: To save up for infrequent costs e.g. Renewing car insurance (annually), annual subscriptions, quarterly subscriptions
MMF 2: To save up for investments in real estate
MMF 3: To save up for school fees (also an infrequent cost)
MMF 4: To save up for luxuries e.g. holidays
MMF 5: To hold money for a chama that doesn’t yet have a formal bank account
Gives a clear picture of your financial position
This greatly helps to give you a very clear picture of your financial position for each of your needs and thus greatly helps to reduce confusion / ambiguity.
If the money was all in “one bucket”, then you could easily fall into the trap of thinking that you have enough (or more than enough) money to meet all of your needs!
This is where the temptation to dip your hand in the sugar dish creeps in… which leads to not having enough money for these needs that you may have committed yourself to… which ultimately leads to the cardinal financial sin: borrowing money to cater for expenses.
Now it’s time to take control of your finances with clarity! So, time to get up and open up a MMF account… or two or three or four…
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