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Why This Government Program Deserved to End

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The economy has shown many signs that it has begun to recover. One of the most promising indicators of an economic rebound is that at least one of the government's emergency programs from last year has gone away, hopefully for good.

This past week, the government guarantee of money market mutual funds expired. Yet while the news may have spooked shareholders in those funds, you really shouldn't have a lot of money in them right now anyway.

A brief history of money funds
For nearly 40 years, money market mutual funds have allowed investors to earn a competitive rate on short-term cash. Generally, these funds invest in a combination of short-term Treasury bills, government agency securities, and commercial paper. The funds seek a minimal amount of investment risk, with the goal of keeping their net asset value locked in at $1.00 per share.

Last year, though, the collapse of Lehman Brothers forced one of the oldest money market mutual funds, the Reserve Primary Fund, to "break the buck," as its share value fell to $0.97. That unprecedented action sent tremors throughout the commercial paper market, and many money-fund investors started making withdrawals from their funds, threatening a modern-day equivalent of the run on banks that was seen during the Great Depression.

Those events forced the Treasury to take action to shore up the industry. Specifically, the Treasury established an insurance fund with a role similar to what the FDIC does for bank customers. In exchange for a fee, funds could participate in the program, and shareholders of participating funds would have any losses restored to them. The program was set up to last for one year, and that year ended over the weekend with no losses suffered.

Why it doesn't matter now
We've all seen how much things have changed in the past year. To a large extent, credit markets have healed themselves. Although not everything has returned to normal operation, companies like Dow Chemical (NYSE: DOW  ) and Wynn Resorts (Nasdaq: WYNN  ) have either gotten or plan to get new financing, and even healthy companies like Intel (Nasdaq: INTC  ) are taking advantage of low rates to raise cash.

Yet the more important reason why money market mutual fund guarantees aren't as valuable as they once were is that those funds are no longer the best way to invest your short-term money anyway.

The better way to save
For a while now, money market funds have had much lower rates than comparable money market accounts and savings accounts at banks. Even though the rates on bank accounts aren't spectacular now either, they beat the pants off the 0.25% and less that most money funds are paying. Take a look:

Holding Company of Bank Unit

Rate on Money Market
or Savings Account

Discover Financial Services (NYSE: DFS  )

1.30%

AIG (NYSE: AIG  )

1.66%

HSBC (NYSE: HBC  )

1.35%

MetLife (NYSE: MET  )

1.00%

Source: Bankrate.

Not only are the rates better, but these accounts come with a longer-lasting backing -- the guarantee of the FDIC up to $250,000 per account through 2013, at which point the amount will revert back to $100,000 per account unless Congress acts to extend the higher guarantees further.

Should you move?
When the commercial paper market almost froze last year, the risk involved with money market mutual funds was high. Now, though, money market fund managers know those risks and can take steps to ensure that they won't suffer from a lack of liquidity even if the credit markets start to malfunction again.

That said, if you're concerned about risk and want to stick with funds rather than insured bank accounts, you can always go with a Treasury-only money market fund. Unless you believe the U.S. government will default on its debt, Treasury money funds are the safest you can get.

For most savers, though, the best answer right now is to go with an FDIC-insured bank account. Higher rates plus a better guarantee combine to yield the safety and security you want. If rates flip-flop later on and money funds start to offer better rates, you can always switch back.

Keeping some of your money safe is smart, but the real income is in dividend stocks. Read about which stocks Todd Wenning has picked as his top dividend payers.

Fool contributor Dan Caplinger has most of his cash in an online savings account. He doesn't own shares of the companies mentioned in this article. Discover Financial Services and Intel are Motley Fool Inside Value picks. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy insures that you'll get the best information possible.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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