PayPal Money Market Fund
In a recent comment, Tech mentioned that PayPal was paying over 5% on their money market fund. In a nutshell, my response was to stay away from the PayPal account for a couple of reasons.
Money Market Fund.
The PayPal Money Market Fund is often discussed together with online savings accounts such as HSBCdirect, ING Direct or EmigrantDirect. Unfortunately, that is not really an apples to apples comparison because PayPal is money market fund whereas the others are all savings accounts.
While that might not seem like a big deal, it is important to understand that a money market fund has the potential to lose money. In my experience, money market funds do not lose money very often but if you are considering this as a vehicle for your emergency savings this would certainly make me think twice.
Unlike banks, PayPal is not FDIC-insured. If you are not familiar with what it means to be FDIC-insured, you can visit FDIC.gov for more explanation but it basically means your funds are protected up to the first $100,000 per depositor per bank.
The fact that PayPal is not FDIC-insured is enough to rule them out for my personal use. While my emergency savings are not pushing the $100,000 limit, it is still a significant amount of money that I do not feel comfortable losing in the event something happens to PayPal. Having my funds in an FDIC-insured account offers me peace of mind with regard to my savings.
While I have not used PayPal enough to have experienced this, I have read numerous articles and stories about how PayPal can freeze an account without notice and it can be difficult to remove the freeze on your funds. I don’t know about you but the idea of not being able to access my funds in an emergency (or just whenever I want) does not sound like a good one.
Not All Bad.
Don’t get me wrong, I do not think PayPal is all bad and have an account with them myself. However, I would certainly recommend against using their money market fund as a savings vehicle for your emergency fund. It might have a place as a sweep account for a small amount of money if you regularly buy or sell through PayPal but I would not go much further than that.
Given that the online savings accounts mentioned earlier all offer FDIC-insured accounts that are regulated (meaning they cannot freeze your funds without notice) and have competitive rates, I would recommend you select one or more from the stable including HSBCdirect, ING Direct or EmigrantDirect.