 Personal Finance PowerPoint Presentation Money Market Funds Prepare to get financially fit by practicing personal finance Most of this information comes from the Vanguard website, which you can find online at investor.vanguard.com In prior presentations, we've been taking a look at investment goals, strategies, tools, keeping in mind the two major categories of investments that be in the fixed income, typically the bonds and the equities, typically the common stock. We also want to think about other tools we might be using, such as mutual funds and ETFs, possibly helping us to diversify with a lesser upfront investment as opposed to investing in individual stocks and individual bonds. We had a quick overview of the different kinds of mutual funds in prior presentations. There's just a list of them now, and now we're going to drill down more on to the money market types of funds here. So we've got the money market funds, bond funds, balance funds, stock funds, international funds, sector and specialty funds. Now remember, the mutual funds in general are kind of like we're going to be pooling our money together with other investors. We're going to have a fund manager then have that pooled money, which now they can invest in some more diversified portfolio of funds, but the diversification that the fund manager has the capacity to invest in can be somewhat limited, depending on how much we want to limit it, depending on what type of fund. For example, we are investing in and also always keep in mind that you might want to look at index funds as well, which also limit the investor. So they're kind of investing in the average of the market. Those kind of things might lower the costs for the managing of the fund. Also, when we're thinking about these different funds, you might have a strategy that you're trying to, for example, the broadest strategy would be you're investing in individual stocks and individual bonds. Most individual investors saving for retirements are going to use tools like mutual funds or ETFs because investing in individual stocks and bonds in and of themselves as your full investment strategy can be difficult as an individual investor. So you might be using mutual funds. If you're using mutual funds, then the question is do you want to be picking sector-specific mutual funds or mutual funds on, say, these different areas, for example, or do we want to try to get like one mutual fund that can basically diversify for us? Those are some questions that you want to be pondering when you're thinking about that. Also realize that when you're thinking about a 401k plan or an IRA or some type of retirement plan, you can imagine them as an umbrella over the investment tool, which is usually some kind of mutual fund. So the mutual fund itself could be under the umbrella of, say, an IRA or 401k plan, but the IRA or 401k plan, in other words, isn't really something different than usually something like a mutual fund, the actual tool that's being invested. It's just that you now have the tax complications with it. You typically have the tax benefit. That's why you put the money in under that umbrella of an IRA or 401k plan and you also have restrictions to take it out. So you wouldn't do it unless you have that benefit. Now we're going to dive in a little bit more detail into the money market funds. Remembering that in general, in overview, the money market funds can be thought of as a low risk and generally low return type of investment. In essence, a place where we might want to park our money if we want and think that we're going to need to dip into it to use it for some reason in the future and want to have it available but possibly still get some return on it. In other words, we would expect the money market fund not to make as much a return as or have the potential to make the return as equities, although there's going to be more fluctuation in the equities in the stock funds, for example. Or even in the bonds, we would expect that there's going to be more fluctuation in the bond funds. The money market funds then might be a place for us to kind of park our cash in case we want to use it basically in the short term in the future. Remember that we're looking at this from the standpoint of Vanguard but you can apply the same kind of concepts to money market funds in general. 100% of our low cost as a Vanguard, money market funds perform better than their peer group averages over the past 10 years. Okay, Vanguard, so preserve your cash until you decide how to use it. You got the minimize market risk. Money market mutual funds offer you a place to store your cash and potentially earn income without as much risk to your investment as stock or bond funds. So if you put your money into the stock or bond funds, then oftentimes they're still fairly liquid because you could sell the funds and there might be some restrictions depending on the type of funds you're invested in but oftentimes they're still fairly liquid type of investments in that sense. However, there's going to be volatility related to it because the stock and bond funds could fluctuate up and down. We also want to note that when you think about the equity funds, you kind of tie them to the stocks and you say, well, that makes sense because if I invest in stocks, the stocks kind of go up and down. When you look at the bonds, it might be a little bit more confusing because when you buy an individual bond, you're basically kind of making a loan and you're saying, I'm going to get a fixed set of income stream and I'm going to get the bond principal at the maturity of the bond. But when you invest in the bond fund, that means the fund manager is investing in different bonds. So it's a little bit different the structure of it than if you bought like an individual bond and there might be, of course, again, more risk to the bond funds than simply a money market fund. Okay, park your money temporarily. Keep your cash in a money market fund for a short term needs or until you decide how to invest it. So if you don't think it's a good time, for example, be putting your money in the market. You're waiting for, say, a drop in the stock market so that you can buy it a low or something like that. Then you might need some place to park your cash, some place possibly other than the checking account, some place where you possibly can get some return on it until you're ready to pull the trigger. That's why it's going to be a temporary type of thing or temporary type of investment generally. Get easy access to your cash, transfer money between your bank and your Vanguard accounts whenever you need to. So if you're making transactions fairly routinely or something like that, it could be easier to use, say, a money market fund if you're working on like a Vanguard platform or something like that to transfer money to and from as you're making trades, for example. Settle brokerage trades. Your settlement fund is used to pay for and receive proceeds from brokerage transactions including Vanguard ETFs in your Vanguard brokerage account. So that's from Vanguard. So are you investing outside of an IRA or other retirement account? So as we make these types of investments, we have to think, are we using these tools, which are the same kind of investment tools, mutual funds typically, under the umbrella of an IRA or some type of retirement account because there's going to be tax consequences in that instance and there's going to be differences in terms of when we have to recognize the gain and that has an impact on us because there's tax consequences related to it. So if you're in one of the highest tax brackets and investing outside of your retirement account, you may be able to reduce your tax exposure with a tax exempt money market fund. So find out if tax exempt mutual funds are right for you. Cut your federal tax bill with a national tax exempt fund. Get added savings if you live in one of the following states, California and New York.